Gold notoriously difficult to value but still makes sense as an inflation hedge says BlackRock

24th April 2013

Blackrock’s chief investment strategist Russ Koesterich says there is a case to hold small amounts of gold as an inflation hedge though he says it is notoriously difficult to predict levels beyond this.

“In the near-term, we do not have a strong view about the short-term direction of gold prices and cannot say whether gold has hit a bottom. Determining valuation levels for gold is notoriously difficult since gold does not have a cash flow that can be discounted. Additionally, it is hard to assess supply and demand dynamics since there is very little industrial or practical demand for gold.”

“We do believe, however, that there is some benefit to holding small amounts of gold in a portfolio on a long-term basis. As a physical asset and as a historic store of value, gold remains an important source of diversification since it tends to behave differently than paper assets. Further, gold has historically performed well when interest rates are low, as they are today. To the extent that central banks will be maintaining a stance of accommodative monetary policy, this should be supportive of gold prices. Given this backdrop, our view is that investors who are holding gold for its diversification benefits and/or as an inflation hedge should continue to do so.”

Discussing equity markets he suggests that while equities are still the place to be, markets are more nervous and it may make sense to consider a move to a more defensive position.

“In response to signs of slower growth, investors are starting to become more defensively positioned and are growing more nervous about the state of the markets. One way this can be measured is by looking at the VIX Index, a gauge of stock market volatility that is also known as the “fear index.” Until recently, the VIX had been trading close to a multi-year low of 11, signaling widespread complacency. Last week, however, the VIX spiked to 18, which is closer to its historical average.

“We would continue to suggest that investors overweight equities, but we also think it makes sense to consider a more defensive portfolio positioning. That said, we would be careful about rotating into classic defensive areas of the market such as the utilities and consumer staples sectors, both of which look extremely expensive. We would also be cautious about small cap stocks, which look more vulnerable in times of slower growth and higher volatility. Instead, we would stick with our recommendation to focus on mega-cap stocks (which have recently been outperforming). In fixed income markets, we would also re-emphasize our favorable view toward municipal bonds.”

17 thoughts on “Gold notoriously difficult to value but still makes sense as an inflation hedge says BlackRock”

  1. Forbin says:

    Hello Shaun,

    I haven’t seen any increase in Savers rates , I guess it depends on what fatasy figures they are using

    I mean they are smokin’ something , aren’t they ( or is it all the sex and drug abuse 😉 )

    “the rate for households’ new time deposits increased by 12bps to 1.68%.”

    Weasel words “new time deposits” – mind you anyone with any sense isn’t going to hang around in a savings account thats just dropped its bonus rate are they ?

    Are they ?

    the main figures show that the middle to top incomes are still in pay off mode whilst the poorest are stuck now with pay day lenders

    presumably some who got their new houses now have borrowed money off the paydayer’s to furnish them……

    What could go wrong ?

    increasing strain whilst the Top Hatters whistle to the Bank knowing that the Hoi polio are not going to do anything whilst EastCorriDale and Footy is on the Box…..

    ( and if they do Riot then it will be an insurance job to replace all those sneakers and yesterdays Iphones… backed by to big to fail Insurance companies )


    PS: soon there will be no money for popcorn …..

    1. Anonymous says:

      Hi Forbin

      In a way the current situation was highlighted by this on twitter a few minutes ago.

      “@BBGVisualData 29m

      U.S. measles cases reach 20-year high.”

      Let us hope that this is one US trend that we do not copy at a later date.

      I am still waiting for the drop in corn prices to impact the price of toffee popcorn…

  2. Pavlaki says:

    The re emergence of high levels of consumer debt worries me and it may well be one of the reasons why the B of E is sitting on its hands right now. Newspapers full of headlines about rising debt and repossessions isn’t what a government wants just before elections! On a personal level I know of two families locally who have way too much debt and who are enjoying a lifestyle based upon current interest rates. At the weekend I met a another couple who, on the surface, appear to have it all. They live in Richmond, drive a Range Rover and live it up. As it happens and unbeknown to them, I know that they have had to take out short term loans to meet the interest payments on their mortgage and debts. Things are not always what they may at first appear! I wonder how many others are out there. the B of E’s bill failure is not to have made even a small increase in rates earlier to send a signal to these type of people who may have thought twice about debt levels.

    On the subject of bank interest rates, I have had two banks write to me informing me that they are decreasing my interest earned on deposits! Obviously they anticipate a base rise soon at which point they can be seen to raise rates in line with the market. Or am I just too cynical?

    1. Forbin says:

      Pavlaki, if the paydayer increase is any sign then we’re in for a world of hurt

      pretty soon too

      where’s Prog when you need him ? 😉


  3. Pavlaki says:

    Please read – the B of E’s big failure, not bill. Fat fingered syndrome!

  4. arrbee says:

    Is it possible that student debt is excluded because providing a figure would involve making a formal calculation of how much will be written off ?

    1. Anonymous says:

      Hi arrbee

      I suspect that they want to keep the subject out of the limelight in its entirety! Also the Bank of England can see that it is a a ticking time-bomb and is standing as far back as it can….

  5. Paul C says:

    It is a tad worrying, I had not expected it to be so black and white, minuses for business borrowing and pluses for consumer leverage. In China where there is very little bank lending for business re-investment of profit is the only way and they were successful but I suspect there are not enough SME’s with a fair crack at any market to grow in such a way.
    This is proper cronyism and there is very little mass media critique of the situation, as if the new normal as brain-washed folk that this is both stable and desirable.
    I think it will be incredible to see the situation maintained through another UK election. Just imagine how extreme some of the indicators will be in a years time for I am sure that there will be fire-fighting in the extreme to maintain the appearance of status quo for 12 months more.
    I don’t usually eat pop-corn but I might start competing for some of Forbins.

    1. Anonymous says:

      Hi Paul C

      I think that we are continuing the moves to extremes even though the UK situation is currently positive overall. So whilst some are in effect saving by paying down debt (a much better net interest-rate..) I fear that others are slipping down a debt filled spiral

  6. ExpatInBG says:

    The NICE decade was an illusion caused by the failure to register average 10% PA House price inflation into UK inflation statistics.

    Therefore I think the 4.5% rates is a bad baseline to reference. I remember paying 8 or 9% post 1997.

    1. Anonymous says:

      Hi ExpatInBG

      Due to the way that the National Statistician chose the Rental Equivalence method for CPIH (H=Housing) we are making the same mistake again. As to a “neutral” interest-rate I think that it is lower now but what got forgotten was that it is not fixed and changes according to circumstances..

  7. anteos says:

    great article as ever Shaun. I noticed today that student debt is now being taken into account by the banks:

    so even if the government is hellbent on rising house prices, the banks are sensibly reining them in.

    1. Anonymous says:

      Hi Anteos

      Thanks for the link. I noticed the bit where a student claimed they were told it would not count in mortgage calculations. It is a bit like one description of the 8th army in Africa before Montgomery got a grip on it “Order,counter-order,disorder…”

  8. digger says:

    I came across this blog regarding empty buildings in Leicester.The city centre is full of empty factories,office space and shops.There are 6 ’empty Leicester’ entries.All depressing.
    Osbourne’s recovery is nowhere to be seen you will note.

    The one aspect of city centre degradation that I’m surprised by is how many of these places have been empty for years.It seems they’re not loss making until they’re sold

    1. Anonymous says:

      Hi Digger

      On Saturday I passed a development in the Farnborough area that is like that, it was called the Meads development and now has plenty of empty shopfronts. Although to be fair there is a redevelopment scheme planned (which I hope works better than the last one…)

  9. dutch says:

    Shrimpers,an excellent summary and I particularly enjoyed the phrase

    ‘hallucinogenic deflators’ which sums things up all too succinctly.

  10. Anonymous says:

    Hi Guys

    It is a good phrase isn’t it? Indeed from September they may even add to GDP…

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