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After our recent blog Spot Gold and Gold Miners Are NOT Two Sides of the Same Coin (May 21, 2020), investors have inquired about how gold has behaved around volatility spikes. Specifically, how might gold perform both during and after the dramatic increase in volatility experienced in March 2020?
To answer this, we use a research framework developed in a 2018 IAS publication, When the Dust Flies: How Volatility Events Affect Asset Class Performance. In this paper we examined the performance of stocks and bonds before, during and after sharp increases in equity market volatility. We define a volatility spike month as one where average daily equity volatility for the month increases by at least 50% over the average daily volatility two months earlier. For example, March 2020 is labeled a volatility spike month as the average volatility level increased by more than 50% in comparison to the average volatility in January. In our study the two-month period, February and March 2020, is defined as the volatility event. Going back to 1950 we studied 26 volatility spike events.
During the recent two-month COVID-19 volatility spike event, spot gold returned 1.6% while the S&P 500 was down 19.6% (as of March 31, 2020).
More generally, we studied gold performance around 15 volatility events for the period from February 1, 1973, to April 30, 2020. First, note that spot gold had better cumulative returns than US equities, on average, during a volatility event, highlighting gold’s defensive properties. Second, gold bullion on average had a cumulative total return of 27.9% for the 21-month post-spike period, gold miner equities had a cumulative return of 37.1%, while the S&P 500 had a 26.7% cumulative return.1
After the April 1978 volatility spike event, spot gold enjoyed a 280.9% cumulative return in the 21-month post-spike period, a high inflation period, from May 1, 1978, to January 31, 1980. However, even in today’s low inflation period, we have seen high gold returns. For example, in the 21-month period after the October 2008 volatility event, from November 1, 2008, to July 31, 2010, gold returned 61.3% on a cumulative basis, outperforming the S&P 500’s 19% cumulative return.
In turbulent and uncharted times, perhaps reviewing historical records may provide a compass for the future. Uncertainty or not, gold-related assets may find their place in investors’ portfolios.
*Article written for LinkedIn by Harsh Parikh, Principal and Head of Real Assets Research Program, PGIM Institutional Advisory & Solutions. Material reflects the views of the author as of May 21, 2020, and is for informational purposes only.
Sources: Barclays POINT, Datastream, London Bullion Market Association, FRB St. Louis (FRED), Global Financial Data, and PGIM IAS.
1. Gold miner equities (Datastream G12 Gold Mining Index) performance is available from February 1, 1973. So that we can also compare gold miner equity performance, we analyze performance for the period from February 1, 1973, to April 30, 2020. Member nations of the London Gold Pool formed a two-tiered gold market system only in March 1968, after which the spot gold prices could fluctuate in a free market.