WisdomTree: Time for gold to shine

WisdomTree: Time for gold to shine

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By Mobeen Tahir, Associate Director, Research

During times of heightened economic uncertainty or market volatility, investors typically turn to gold to preserve the real value of their portfolios. Such events serve as reminders of the value of the precious metal in a strategic asset allocation, i.e. nobody knows when a black swan will land. They can also provide attractive entry points for tactical and strategic investors alike. While there are no certainties as to how the price of an asset will move in the future, history can be our guide in identifying helpful leading indicators. If gold behaves as it has in the recent past in response to financial market volatility and economic uncertainty, it may be in for a strong bull run.

A volatility shock like before

Financial market volatility has often retreated quickly following sharp surges historically creating spikes as evident in the VIX Index (CBOE Volatility Index). Some spikes are relatively contained, like the one in February 2018 which resulted from trading activity in the VIX derivatives market. A broad market meltdown did not manifest thereafter, and volatility levels dropped back quickly. There are, however, only two instances when the VIX spiked to more than 4x its historic average of 18 since the index started in 1994. The first was in October 2008 and the second, in March 2020 (Figure 1).

A shock of this nature is symptomatic of something fundamentally shaking market confidence. In 2008, it was the banking crisis and now, it is the coronavirus pandemic. In 2008, VIX peaked above 80 and retreated very gradually and now, it surpassed 80 in March and is descending leisurely. In 2008, markets endured losses as the global economy fell into recession and now, markets have fallen as the global economy has come to a standstill. In 2008, we saw gold embark on a strong bull run that lasted nearly 3 years and now, we may see something similar.

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Source: WisdomTree, Bloomberg. Data as at 06/04/2020. VIX Index refers to the Chicago Board Options Exchange’s (CBOE) Volatility Index. You cannot invest directly in an index. Historical performance is not an indication of future performance and any investments may go down in value.