A Prudent Defense: Gold as a Counterweight to Equities
Institutional investors have long sought ways to benefit from the upside of equity investing while limiting their exposure to the downside. A particular concern is left-tail risk—low-probability/high-severity events that can cause a precipitous drop in stock prices. In this paper, we explain why we believe gold may be an effective way to hedge a long-only equity portfolio against left-tail risk.
The use of hedging techniques is speculative and there can be no assurances any hedging technique will be effective. Investment in gold and gold-related investments presents certain risks, including political and economic risks affecting the price of gold and other precious metals, like changes in US or foreign tax, currency, or mining laws; increased environmental costs; international monetary and political policies; economic conditions within an individual country; trade imbalances; and trade or currency restrictions between countries. The price of gold, in turn, is likely to affect the market prices of securities of companies mining or processing gold, and accordingly, the value of investments in such securities may also be affected. Gold-related investments as a group have not performed as well as the stock market in general during periods when the US dollar is strong, inflation is low, and general economic conditions are stable. In addition, returns on gold-related investments have traditionally been more volatile than investments in broader equity or debt markets.
The commentary represents the opinions of Matthew McLennan, Head of Global Value Team and Portfolio Manager; Thomas Kertsos, Associate Portfolio Manager of the First Eagle Gold Fund and Senior Research Analyst; and Max Belmont, Research Analyst, as of February 2018 and is subject to change based on market and other conditions. The opinions expressed are not necessarily those of the entire firm. These materials are provided for informational purpose only. These opinions are not intended to be a forecast of future events, a guarantee of future results, or tax and/or investment advice. Any statistics contained herein have been obtained from sources believed to be reliable, but the accuracy of this information cannot be guaranteed. The views expressed herein may change at any time subsequent to the date of issue hereof. The information provided is not to be construed as a recommendation or an offer to buy or sell or the solicitation of an offer to buy or sell any fund or security. Past performance does not guarantee future results.