The banking crisis of the first months of the year has not infected the whole stock market.
The index S&P 500 fell only 2% in the weeks immediately following the bankruptcy of the SVB to then return slightly to rise in the following days. Overall, since the beginning of the year the shares are still in “verde”.
But a stock market crash is not the only sign of panic in the investment world.
Due asset “risk off” they moved higher in the first quarter of 2023. And that could be a big sign that something is changing among investors.
Both assets historically serve as a hedge during tough times. But neither did a good job last year (in 2022).
Now, however, they are starting to rise again.
This article talks about:
What are risk off and risk on activities?
The easiest way to split the activity classes according to the feeling of risk perceived by investors and is to separate them into two categories: “risk on” e “risk off”.
The assets risk-on they tend to rise more during good times. The actions I’m an example. And high-growth stocks, which tend to be more volatile, usually perform even better when investors are elated.
The assets risk-off I’m the exact opposite. These investments tend to outperform assets risk onbut have a good chance of protecting your wallet from losses excessive during difficult times. Put another way, they tend to do well when scared investors want to take less risk. So investors favor these assets for safety or for defend yourself from perceived difficult moments.
US Treasuries and gold were the two assets of “risk aversion” most important throughout history. They are generally the assets of reference for investors who fear an economic and financial meltdown.
In 2008, for example, the iShares 20+ Year Treasury Bond Fund (TLT) ETF – which holds a basket of long-term Treasury bonds – grew 34%. Gold, represented by the SPDR Gold Shares (GLD) ETF, also held up 6% that year.
Asset risk-off: why didn’t they work in 2022?
However, last year things didn’t go exactly as you are told above!
These assets risk-off they didn’t work well at all, disappointing savers’ expectations!
Long-term Treasuries fell more than stocks last year. Gold went nowhere, staying”flat”. As you can see, these assets have mostly moved up and down in tandem with the stock market. This is not the performance we would expect from these risk-off assets.
All of this happened because interest rates soared.
Higher rates meant more competition for gold, which pays no dividends or coupons. While the long-term obligations with lower yields they took a hit for the same reason. As a result, risk-off assets have failed miserably in their “mission”.
But now things could change!
The recent banking crisis scared investors. The bond index is up 5% and gold has jumped more than 10% and apparently hasn’t finished its run yet.
Given the turmoil in the banking sector, the Federal Reserve may stop raising interest rates, meaning “risk-free” assets could return to normal in the near future.
Is it time to seriously invest in gold?
Inflation to a 40-year high should have pushed the yellow metal, which is considered an inflation hedge. Gold was expected to provide high returns. But investors never got what they expected.
From the beginning of the pandemic in February 2020 until November 2022, gold was not very volatile and, moreover, fell by 1% over the period considered. But apparently the fate of gold seems to change in a short time.
Why is gold ready for a bull run?
The answer lies in the high correlation between the US dollar and gold prices.
Correlation means how much the returns of two assets mirror each other. A negative correlation occurs when two assets move in opposite directions at the same time. And the dollar and gold have a negative correlation.
In simple terms, inflation isn’t what really matters for gold – it is dollar you have to watch!
The US dollar index had been steadily rising since 2021. In November 2022, however, that long-term trend officially reversed. In fact, a 10% drop began and lasted until February 1st.
The dollar has rallied a bit over the past month, but that was short-lived. And this decline in the dollar is exactly what gold investors need.
In short, if we want to know where gold is headed, we have to follow the dollar.
So, let’s take a long-term look at the US dollar.
Rate hikes tend to strengthen the dollar, while rate cuts hurt the value of the “greenback.”
So, if interest rates peak and then start to fall, that means we can expect the dollar to fall. And the FED shouldn’t be far from the latest rate hike.
In EuropaFurthermore, inflation is even higher than in the US and rates are slightly lower. This means that the European Central Bank has more room to raise rates. This could strengthen the euro.
All this supports the thesis of a weaker dollar. And as we now know, a weaker dollar is a strong signal that gold should rally.
The yellow metal is up 10% in less than a few weeks.
We can therefore conclude that the conditions are being recreated for investment in bonds and gold to go back to doing their job again.
Clearly no one gives us the mathematical certainty that they will start to rise again. The “black swan” is always around the corner on any type of investment!
But you should consider putting them at least partially in your portfolio.
It is probable, in fact, that this year i balanced portfolios come back to give satisfaction.