The sell-off in gold during the Iran war has further weakened the case for its role as a defensive hedge in investor portfolios.
This is the view of Tai Hui, chief market strategist, Asia Pacific at JP Morgan Asset Management, who said at a media briefing on Thursday that “gold did not work as a hedge against geopolitics”.
“We’ve been arguing for quite some time that gold is not a very good hedge against anything. If you look at its correlation with equities or risk assets, it’s not very consistent,” Hui (pictured) said.
Over the course of less than a month, the price of gold slumped from $5300 per ounce to as low as $4300 per ounce as the conflict in Iran dragged on.
Much of the price decline was due to investors needed liquidity and using gold as a first call owing to the fact that it has been of the best performing assets over the past twelve months.
Many investors still view gold as a hedge against geopolitical events, despite the fact that its track record of performance during political events is weak, according to Hui.
He pointed out that over the past 30 years during geopolitical events, the performance of gold has not delivered a consistent upside.
“We’re not even talking about 70% of [geopolitical] events get an upside. It’s like 50/50. It’s a coin toss,” he said.
“Its volatility is as high as emerging market equities. It does not generate income. Obviously in the last two years if you owned gold, you didn’t care about income, but the cost of carry is something to think about.”
“If you’re owning it to enhance your return because of the fundamentals of central bank buying and the so-called debasement trade, that makes sense, but if you’re owning it in the belief that it can help you to offset market corrections, it’s not a particularly reliable tool.”
Yet despite this, he said there are still good reasons to own gold, particularly due to the long-term demand from central banks and investor hedging against rapid growth in money supply and debt.
“As the supply of gold growth is limited, so there’s an investment case for gold, but we have to be super clear that gold is an investment asset, not a hedge asset,” he explained.
“Gold, to us, is still an interesting asset to be included in asset allocation, but we just need to understand that in terms of the role it plays, it’s more of a return enhancement rather than a risk management tool.”