Gold to replace US Treasuries as the ‘ultimate risk-off asset’ – strategist Published time: 25 Oct, 2018 14:44
Gold to replace US Treasuries as the ‘ultimate risk-off asset’ – strategist Reuters / Yuya Shino
A report by financial services organization INTL FCStone has measured gold’s ability to act as a hedge against stock market volatility, which “varies from decade to decade.” According to the report, if the US Federal Reserve continues to steadily raise interest rates, gold will replace US Treasuries as a safe-haven asset.
“If, as I expect, rates will go higher for longer, much higher for much longer, gold will replace Treasuries as the ultimate risk-off asset, and investors should own it as an insurance against equity market risk,” said INTL FCStone global macro strategist Vincent Deluard.
He noted that the precious metal tended to rally during “big down weeks for the stock market between 1985 and 1995, when the memories of the great inflation were still fresh.”
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rt.com 85 67 people are talking about this Twitter Ads info and privacy Gold’s value as an equity hedge declined during the “great moderation” of the late 90s, Deluard said, adding that Treasuries emerged as the new risk-off asset during the deflationary years that followed the financial crisis of 2008. “However, gold has outperformed Treasuries on bad stock market weeks since the Fed started hiking rates in 2015,” he said.
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The report also highlighted that the Fed’s “put” has been waning when it comes to US Treasuries. A "put" option is an option to sell assets at an agreed price on or before a particular date.
INTL FCStone’s strategists added that foreign investors do not favor US Treasuries because American yields are “often negative on a currency-hedged basis.”
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Often forgotten, or in some quarters deliberately ignored, gold performed extraordinarily well in the disinflationary aftermath of the 2007-2008 financial crisis appreciating from $650 per ounce in January, 2007 to over $1800 in August, 2011. The consumer price index, on the other hand, was bumping along either side of zero and had the potential to evolve to a full deflationary spiral. Inflation, in short, was not an issue. Though gold is generally considered an historically-proven inflation hedge, it is also an historically-proven disinflation hedge as the post 2007-2008 example demonstrates. Investors from 2007 on were interested in gold for its safe-haven characteristics and as a refuge from a potential full-out financial system breakdown. One of the great advantages of being a gold owner is that it is an investment for all seasons protecting its owners against inflation, disinflation, deflation or hyperinflation.
Note .... The gold bull market in the 1970s and 1980s happened even as the Fed tested record-high interest rates. The yield on the 30-year Treasury bond rallied sharply during the late 1970s, eventually topping 15% in 1981. Gold rallied from about $100 per ounce in 1976 to over $850 per ounce in 1980.