Gold Hedged Investing

 

The Investment Case

Why Gold Hedged Investing?

 “Gold hedged investing” is a method of accessing gold returns that keeps current asset allocations intact. Gold is the world’s oldest currency and gaining exposure to it can diversify investor portfolios away from their home currency. Like with any currency, exposure to gold can be taken either in physical form or by synthetic exposure. gold hedged investing involves “porting” gold returns into an existing portfolio by accessing exposure via gold futures positions overlaid as a “hedge” onto an equity position. Accessing gold this way, rather than via any physical-based holdings, conserves investment capital within the portfolio for other productive uses. more...less...

White Papers and Research

New! World Gold Council White Paper: Gold in a world of negative interest rates:  

New! Access the S&P white paper on Gold Hedged Strategies:  

Read the World Gold Council paper – Gold and currencies: hedging foreign-exchange risk:  

Alan Greenspan’s timeless essay: Gold and Economic Freedom

Frequently Asked Questions   

What is "gold hedged" investing?

Gold hedged investing is the application of an overlay to an investment portfolio that gives the portfolio exposure to the price movements of gold.

Why not invest directly in gold?

A direct investment in gold, such as owning either physical gold or a fund that owns physical gold, requires an up-front payment to purchase the asset. To finance this up-front payment, an investor may need to sell other assets, such as equities, which can change an asset allocation mix. A futures contract, by contrast, is an agreement to purchase the asset at a future point in time. Instead, gold hedged investing takes exposure to the price fluctuations of gold via futures in an amount approximately equal to the amount of equity exposure, and rolls the futures before they expire.

What makes gold a currency?

Gold is considered to be "money" or a "currency" by many notable investors and financiers including J. Pierpont Morgan, Alan Greenspan, and Ray Dalio (founder of Bridgewater, at times the world's largest hedge fund). It is considered so because it meets the six tests necessary for any substance to be considered a currency: durability, portability, divisibility, uniformity, acceptability, and limited supply.

How is gold a US dollar hedge?

The value of a currency can only be measured vs. another currency or vs. a basket of goods. In that sense, gold is a USD hedge when measured in terms of gold, as the correlation is -1.0. However, gold may still be viewed as a good overall USD hedge when compared against a basket of foreign currencies that include EUR, JPY, GBP and other major currencies, as gold has -0.4 correlation with the basket's change against the dollar over the period from December 29, 2005 through December 30, 2015.

Can gold act as a hedge during tail events?

Gold can reduce portfolio losses during some, but not all, events that give rise to sudden, extreme market downturns. These downturns are often referred to as "tail events." In particular, gold can reduce portfolio losses during financial-related economic downturns, which may give rise to a "flight to quality." For more information, see World Gold Council: Gold: hedging against tail risk, September 2010.

How is gold an EM currency hedge?

Emerging market currencies can often be expensive to hedge, both because of interest rate differentials and high transaction costs that may be associated with trading such currencies. However, emerging market currency may fall sharply during "flight to quality" situations. Because flight to quality may positively impact the price of gold, gold can act as a hedge against the risk of this type of situation.

Why not gold hedge my own portfolio?

An investor with the ability to trade gold futures contracts and who was willing to periodically roll and rebalance their gold futures exposure could gold hedge their own portfolio.

Does gold diversify a portfolio?

Historically, gold has shown low and sometimes negative correlations to equity markets while exhibiting positive returns over long time periods. On this basis, gold is generally considered a valid way to diversify equity portfolios.

Is there "contango" or "backwardation" risk?

Yes. If gold hedged investing takes gold exposure via futures, the total performance of the investment will be affected if the future level of gold is higher than the current price of gold (a condition typically referred to as "contango") or lower than the current price of gold (a condition typically referred to as "backwardation"). However, because it is relatively straightforward to hold and store gold, the future price of gold may experience less fluctuation relative to its current price than may be the case for commodities that are perishable or expensive to store.

Who is REX?

REX Shares, LLC (“REX”) creates and delivers intelligently engineered ETFs that address access and efficiency problems. REX was founded in 2014 with a focus on goldhedged equity investment strategies. These strategies provide a way to gain gold exposure within portfolios without sacrificing existing asset allocations. Greg King, REX founder, has a track record as an entrepreneur in the ETF industry and has brought innovation and transformational product engineering to the space. In 2006 he created the iPath™ platform for Barclays and subsequently co-founded VelocityShares™, LLC. REX is based in Westport, Connecticut.

News and Insights

 

A Conversation with Ray Dalio

The Council on Foreign Relations

The Founder and Co-Chief Investment Officer of Bridgewater Associates discusses gold as a currency.

David Einhorn, Founder and President of Greenlight Capital

Einhorn speaks on his view of gold as money and as a portfolio diversifier.

Jim Grant, Founder and Publisher of Grant’s Interest Rate Observer

Speaks on gold as an investment in periods of monetary uncertainty.

Gold Hedged Index Data

 

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S&P 500 Dynamic Gold Hedged Index

Index TickerSPDGl5UT
10 Year Index Return12.76%
Correlation to S&P 500 Index0.72

The S&P 500 Dynamic Gold Hedged Index is designed to simulate S&P 500 returns hedged against the fluctuations of the U.S. Dollar versus gold. The index is designed to protect portfolios against adverse movements in the value of the U.S. Dollar relative to gold. more...less...

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Standard Deviation29.45%
Index ProviderStandard & Poors
Index Dividend Yield2.20%
Index Closing Value5,712.08
Beta vs S&P 5001.02
Price/Earnings Ratio17.49
Price/Book Ratio2.58
Sharpe Ratio0.39
Index Inception Date9/28/2015

Data as of 12/31/15

FTSE Emerging Gold Overlay Index

Index TickerFTEMGDN
10 Year Index Return7.24%
Correlation to S&P 500 Index0.35

The FTSE Emerging Gold Overlay Index has been designed to reflect the performance of the FTSE Emerging Index combined with a long position in gold futures. Gold is generally considered a safe haven asset in contrast to Emerging market equities. As such, a gold overlay may provide diversification opportunities when combined with Emerging market equities. more...less...

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Standard Deviation32.90%
Index ProviderFTSE Russell
Index Dividend Yield3.25%
Index Closing Value391.49
Beta vs S&P 5000.55
Price/Earnings Ratio12.89
Price/Book Ratio1.54
Sharpe Ratio0.18
Index Inception Date1/7/16
Number of Index Components953
Top 10 countries and % Weights
 China28.70%
 Taiwan14.51%
 India13.28%
 South Africa8.57%
 Brazil6.69%
 Mexico5.51%
 Malaysia4.35%
 Russia4.23%
 Indonesia2.61%
 Thailand2.50%

Data as of 12/31/15