Advisers say go for the gold as the perfect hedge for trade-war fears

Gold was up nearly as much as the S&P 500 was down in mid-day trading Monday

Aug 5, 2019 @ 1:54 pm

By Jeff Benjamin

As international tariffs and trade-war chatter has investors suddenly fleeing the equity markets, gold is rallying as a logical safe-haven play.

The S&P 500 Index was down more than 2% in mid-day trading Monday, following the market's worst week of the year with a decline of nearly 3%.

But gold has held up as one of the few bright spots, which is an example of gold doing exactly what it is supposed to do, according to Janet Briaud, founder of Briaud Financial Advisors.

"The technicals for gold are very positive, and it has rallied well this year," she said.

Ms. Briaud mostly allocates gold in her clients' portfolios through exchange-traded funds like SPDR Gold Shares (GLD), which is up more than 12% from the start of the year and was up 1.7% in mid-day trading Monday.

Since December, Ms. Briaud has doubled the allocation to gold in client portfolios to 10%, but for clients who want even more exposure to the precious metal she is recommending gold mining stocks through funds like VanEck Vectors Gold Mining (GDX) and Fidelity Select Gold Portfolio (FSAGX).

"I tell my clients that gold mining companies are more volatile than gold, and they are not for the faint of heart," she said.

That increased volatility was in full form Monday when GDX was up more than 4% in mid-day trading. So far this year, GDX is up more than 31%.

FSAGX is a mutual fund that won't price for the day until after the market closes, but it is up nearly 28% from the start of the year.

Paul Schatz, president of Heritage Capital, said gold is doing so well because it is perfectly suited for the risk facing the equity markets.

"Contrary to popular belief, gold is not this great hedge against all market volatility, because it depends on why the market is volatile," he said. "For example, gold was not a good hedge against the dot-com bubble in 2000, but it is a good hedge against international turmoil."

As an alternative means of storing value, Mr. Schatz said, "the trade war with China is right up gold's alley."

While advisers might not have a lot of choice but to add gold exposure as a hedge to choppy markets on the near-horizon, Mr. Schatz said he will be waiting for a gold-market pullback before loading up on more gold.

"The recent price lows for gold are already in, but at some point you'll see small pullbacks in gold and that will be a screaming buy," said Mr. Schatz, who describes the current gold rally "just an appetizer for what's coming in the 2020s" when he expects gold prices to double where they are today.

The spotlight on gold has been increasing in stride with global trade tensions, mostly between the United States and China, which the asset management industry has met with products designed for low-cost access to gold.

"Investors have gravitated toward gold as a safe haven, given the ongoing trade tensions and the increased volatility in the equity market," said Todd Rosenbluth, director of ETF and mutual fund research at CFRA.

Ms. Briaud does not believe the current gold rush is temporary, but like Ms. Schatz, she believes investors should be cautious about buying too much exposure at current price levels.

"At this level it is very overcrowded, and you might need to wait for a pullback," she said.

However, Ms. Briaud also sees a real risk of a stock market correction or crash that might have some investors and advisers wondering if there is any price too high for a good gold hedge.

"We have felt the market was incredibly overvalued for some time, and we think we're due for a major decline that could go down as much as 50%," she said. "It's just a question of when investors become bearish, because a lot of investors are baby boomers who don't feel like they have the time to ride out another recovery and if they get scared, it could snowball."

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