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.