Email of the day - on hedging exposure to market crashes
Comment of the Day

July 31 2020

Commentary by Eoin Treacy

Email of the day - on hedging exposure to market crashes

My past experience has been that when there is a stock market crash, gold suffers equally.  This pattern was repeated in March this year.  Can you recommend some protective measures?

Eoin Treacy's view

Thank you for this question which is something I believe everyone has an interest it. In a crisis everything falls together. That’s because people end up selling what they can, rather than what they want. Gold, as you say, is not immune to those kinds of events.

The big message, however, is that gold does tend to bounce back strongly because the official response to every crisis is to print more money. This occasion has been no different and the size of the monetary accommodation is both large and global so gold continues to do well despite short-term risk of consolidation.

The only way to hedge the risk of drawdowns during crises is to raise cash when an economic expansion is maturing and prices are divorced from the trend mean. That will at least ensure you have cash when periods of stress create attractive buying opportunities.

However, it is worth considering that the time when people pay most attention to caution and stop strategies is immediately after a crisis. During a recovery leading sectors rebound very quickly and that is discomfiting to investors still dealing with the emotional trauma of the decline.    

The epicentre of risk stays lower for longer. Today that is the travel and tourism sectors. The underperformance of the sector contrasts sharply with the new highs seen right across the precious metals and technology sectors.

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