Once a safe haven, gold no longer a hedge against stocks, inflation – BlackRock

Gold, long viewed as the ultimate safe-haven investment during market turmoil, has become a less effective hedge against moves in equities and inflation, global investment manager BlackRock said March 11.

The precious metal, which gained more than 24.7% in 2020, has slipped 9.1% in 2021. Gold futures have fallen roughly 18.5% from a settlement high of over $2,058 per ounce on Aug. 6, 2020, to $1,678 on March 8, 2021.

"Gold's underperformance might be more tolerable for investors, except for the fact that it has also been failing as an equity hedge," wrote Russ Koesterich, a portfolio manager for BlackRock's Global Allocation Fund, in a March 11 note.

Since September, gold has a positive relationship with equities, rising 0.2% for every one percentage point increase in the S&P 500. The relationship is even closer with technology stocks, rising 0.5% for every percentage point increase, Koesterich wrote. The S&P 500 is up about 4% since the start of 2021, while the S&P 500's information technology sector is down roughly 1%.

"Put differently, gold and tech are increasingly moving in tandem," he wrote.

Gold is also no longer adequate protection against inflation, wrote Koesterich, calling the metal's inflation hedge "somewhat exaggerated." Gold has been viewed as an investment that could counter the impacts of rising inflation, but Koesterich believes that idea is no longer a sound one. The precious metal can no longer keep adequate pace with inflation expectations, at least in the near term, he said.

"While it is a reasonable store of value over the very long-term, think centuries, it is less reliable across most investment horizons, including the most recent period," he wrote.

The five-year breakeven inflation rate, a rough measure of the bond market's view of inflation over the next five years, closed March 10 at 2.47%, its highest level since July 2008. The 10-year breakeven inflation rate closed March 10 at 2.26%, its highest since August 2014.

"As has been the case the past month, this will likely prove a headwind for gold," Koesterich said. "And for those investors still looking for a hedge, one word: cash."

With a $1.9 trillion U.S. stimulus package signed by President Biden on March 11 and vaccine distribution improving, an economic surge would likely continue gold's decline, and Treasury yields are likely to continue rising from historic lows.

"The longer-term technical outlook remains bearish with the precious metal showing a series of lower lows and lower highs since August," wrote Sophie Griffiths, a market analyst with OANDA, in a March 11 note.

Gold's decline has been met with a marked increase in outflows from gold-backed exchange-traded funds. Total known ETF holdings for gold last week dropped to their lowest point since early July 2020, Warren Patterson, head of commodities strategy at ING, said in a March 4 note.