• Wealth Management

Considering Gold as a Market Hedge

Even though U.S. markets are performing well, implementing a hedge against a possible decline could make sense now.

This may seem like a strange time to write about implementing a hedge against U.S. market exposure. The S&P 500 is up 8% so far this year and the tech-heavy Nasdaq is up 16%. Economic and earnings growth are robust.

Meantime, growth in much of the rest of the world has flagged. Emerging markets are down more than 10% and Chinese stocks more than 20%. It appears that U.S. holdings, thanks to the strong dollar and growing technology companies, are seen as defensive by global investors and could benefit from more cash inflows.

But is this sustainable? I’m concerned that investors are too complacent given rising short-term rates, escalating trade tensions, accelerating inflation, weakening housing markets and approaching mid-terms. We are in the late stages of the business cycle. I expect earnings growth to weaken and think new tariffs on China, if implemented, could impede global economic growth.

For these reasons, integrating a hedge against a market correction into your portfolio could be prudent. One way to do it is to allocate a small portion of your assets to gold. Even though Morgan Stanley Wealth Management doesn’t see gold as a strategic asset class since it provides no yield, doesn’t correlate to stocks and bonds in a consistent way, and is subject to large sentiment swings, this tactical move could make sense over the next six months to one year.

Gold is often a beneficiary if recession fears rise, the U.S. dollar weakens, volatility picks up or emerging markets tumble. Given investor complacency about U.S. markets, gold’s price has fallen about 9% this year and it seems oversold. On Wall Street, a small hedge like this is akin to buying insurance; it may not amount to anything, but it can pay off if times get tough.

Bottom Line: Although the current scenario of strong economic growth and rising U.S. markets may continue, hedging some of your exposure against a possible downturn makes sense. Gold currently seems to have the risk-reward characteristics that make it worth considering for such a purpose.