24th April 2013
Blackrock’s chief investment strategist Russ Koesterich says there is a case to hold small amounts of gold as an inflation hedge though he says it is notoriously difficult to predict levels beyond this.
“In the near-term, we do not have a strong view about the short-term direction of gold prices and cannot say whether gold has hit a bottom. Determining valuation levels for gold is notoriously difficult since gold does not have a cash flow that can be discounted. Additionally, it is hard to assess supply and demand dynamics since there is very little industrial or practical demand for gold.”
“We do believe, however, that there is some benefit to holding small amounts of gold in a portfolio on a long-term basis. As a physical asset and as a historic store of value, gold remains an important source of diversification since it tends to behave differently than paper assets. Further, gold has historically performed well when interest rates are low, as they are today. To the extent that central banks will be maintaining a stance of accommodative monetary policy, this should be supportive of gold prices. Given this backdrop, our view is that investors who are holding gold for its diversification benefits and/or as an inflation hedge should continue to do so.”
Discussing equity markets he suggests that while equities are still the place to be, markets are more nervous and it may make sense to consider a move to a more defensive position.
“In response to signs of slower growth, investors are starting to become more defensively positioned and are growing more nervous about the state of the markets. One way this can be measured is by looking at the VIX Index, a gauge of stock market volatility that is also known as the “fear index.” Until recently, the VIX had been trading close to a multi-year low of 11, signaling widespread complacency. Last week, however, the VIX spiked to 18, which is closer to its historical average.
“We would continue to suggest that investors overweight equities, but we also think it makes sense to consider a more defensive portfolio positioning. That said, we would be careful about rotating into classic defensive areas of the market such as the utilities and consumer staples sectors, both of which look extremely expensive. We would also be cautious about small cap stocks, which look more vulnerable in times of slower growth and higher volatility. Instead, we would stick with our recommendation to focus on mega-cap stocks (which have recently been outperforming). In fixed income markets, we would also re-emphasize our favorable view toward municipal bonds.”