Real Asset Strategy

Timely discussion of the recent commodity, REIT, and real asset markets and what it may mean for investors.

August 17, 2017

John LaForge, Head of Real Asset Strategy

Gold—Is It the Place to Hide When Stocks Get Hit?

  • Historically, gold has been a good defensive asset during equity-volatility spikes and major stock-market declines.
  • Yet, gold’s performance tends to fade after only a few weeks.

What it may mean for investors

  • We believe that the benefit from using gold as a hedge against near-term stock market corrections will be short-lived. We expect gold to end 2017 between $1,150 and $1,250.

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“Man is the creature of the era he lives in; very few can raise themselves above the ideas of the time.”

With stocks getting hit last week and gold prices rising, investors have been asking, “is gold the place to be when stocks get hit hard?” Our answer is yes; gold historically has been a good defensive asset when stock-market volatility has spiked and stocks have been hit hard. Table 1 shows gold’s price action during declines in the S&P 500 Index, since 1968. The table shows that gold has generally been a good place to hide when stocks have been hit hard. There are a few Table 1 statistics worth highlighting:

  • Gold has beaten stocks 92 percent of the time, when stocks have fallen by five percent or more.
  • Yet, gold has only had a positive return 53 percent of the time, when stocks declined by five percent or more.
  • Gold performed best when stocks were at their worst. The average gold return was 14.2 percent when the S&P 500 Index fell by 20 percent or more.
Table 1. Gold During Stock DeadlinesGold During Stock DeadlinesSources: Bloomberg, Ned Davis Research Group, Wells Fargo Investment Institute. Daily data. Full date range analyzed: 3/20/1968 - 8/10/2017.

Treasury Bond and U.S. Dollar Performance When Stocks Get Hit Hard

Another question hanging out there is, “has gold performed better than other defensive assets, such as bonds and the U.S. dollar, when stocks have been hit hard?”

Gold has delivered the highest average returns (versus Treasury securities and the U.S. dollar), when stocks have been hit hard. When the S&P 500 Index has declined by 20 percent or more, the average gold return has been 14.2 percent, while the average 10-year Treasury bond and dollar returns were 2.6 percent and 4.8 percent, respectively. Gold returns during major S&P 500 Index declines are shown in the bottom row of Table 1; returns for Treasury bonds are shown in the bottom row of Table 2; and dollar returns are shown in the bottom row of Table 3.

Yet, gold has not been the most consistent outperformer (that is, gold has not always “saved the day” during past major stock declines). During severe stock-market corrections, Treasury bonds and the dollar have almost always outperformed stocks. On the other hand, gold has had a few occasions when it performed even worse than stocks. These statistics can be found in the top rows of Tables 1, 2 and 3.

Table 2. Treasury Bonds During Stock DeclinesTreasury Bonds During Stock Declines
Table 3. U.S. Dollar During Stock DeclinesU.S. Dollar During Stock DeclinesSources: Bloomberg, Ned Davis Research Group, Wells Fargo Investment Institute. Daily Data. Full date range analyzed for U.S. Dollar Index, gold prices, and S&P 500 Index: 3/20/1968 - 8/10/2017; for Treasury bonds: 1/2/1979 – 8/10/2017.

Now, last week’s S&P 500 Index decline was less than three percent, but volatility did spike. In fact, last Friday, the daily VIX (Chicago Board Options Exchange Volatility Index) reading rose by more than 40 percent. This has happened only 12 times, since 1990. Chart 1 highlights the median performance of gold (the gold line), 10-year Treasury securities (green line), and the dollar (red line) around these one-day volatility spikes of 40 percent or more (vertical black dashed line). Notice that gold and 10-year Treasury notes historically have been strong outperformers for weeks leading into, and out of, these volatility spikes. Roughly two weeks after these extreme volatility spikes, however, investors typically have stopped moving into gold and Treasury securities, and returns have turned negative. The U.S. dollar (red line in Chart 1), historically has not been the best defensive asset around extreme daily volatility spikes.

Please keep in mind that predicting stock-market volatility spikes, or even major stock-market declines, is notoriously hard. And they typically don’t last very long, so proceed with caution. The S&P 500 Index corrections of 5 percent or greater have taken (on average) roughly 1 month to evolve; the 10 percent and greater corrections, 4 months; the 15 percent and greater corrections, 8 months; and the 20 percent and greater corrections, 13 months. We conclude with these numbers to remind investors that buying gold, Treasury notes, or the U.S. dollar to guard against severe stock-market corrections can benefit a portfolio, but the benefits likely will be short-lived.

Chart 1. Gold, Dollar and Bonds Before and After VIX SpikesGold, Dollar and Bonds Before and After VIX SpikesSources: Bloomberg, Wells Fargo Investment Institute. Daily data analyzed: 1/2/1990 - 8/11/2017. Day "0" is the day before the VIX spikes 40 percent or more. Lines are indexed to 100 at day "0." Lines represent the historical median performance of the spot price of gold, the U.S. Dollar Index (DXY), and the inverse of the 10-year Treasury yield before and after a daily spike in the VIX of 40 percent or more. VIX = Chicago Board Options Exchange Volatility Index. Past performance is no guarantee of future results. Please see disclosures for index definitions.

Risk Considerations

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. Although Treasuries are considered free from credit risk they are subject to other types of risks. These risks include interest rate risk, which may cause the underlying value of the bond to fluctuate. Real assets are subject to the risks associated with real estate, commodities and other investments and may not be suitable for all investors. Investing in gold, silver or other precious metals involves special risk considerations such as severe price fluctuations and adverse economic and regulatory developments affecting the sector or industry.


S&P 500 Index is a market capitalization-weighted index composed of 500 widely held common stocks that is generally considered representative of the US stock market.

U.S. Dollar Index (USDX) measures the value of the U.S. dollar relative to majority of its most significant trading partners. This index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies.

Chicago Board Options Exchange Volatility Index (VIX) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices.

An index is unmanaged and not available for direct investment.

Global Investment Strategy (“GIS”) is a division of Wells Fargo Investment Institute, Inc. (“WFII”). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

There is no assurance that any of the target prices or other forward-looking statements mentioned will be attained. Any market prices are only indications of market values and are subject to change.

The information in this report was prepared by the GIS division of WFII. Opinions represent GIS’ opinion as of the date of this report and are for general informational purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon.

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