Given the high level of equity prices following the huge rally off March lows, investors may be looking for assets that can provide a hedge in case the recent rally cools. The two classic hedge assets are of course gold and Treasuries. We use roll-adjusted futures returns for both, using ten-year future returns for the Treasury series. Over the very long term, neither of these assets are actually very differentiated from equity markets; betas (volatility relative to the market) for both are very low. Of course, that doesn’t mean they don’t offer value as a source of diversification, just that daily returns from both don’t tend to move in opposite directions in the long term.

What about during periods of stress? In the chart below we show the average rolling 3 month beta for gold and ten-year notes versus the S&P 500 during periods when rolling 3-month S&P 500 returns are in the bottom 5% of all periods.  In other words, this chart shows how much these hedge assets tend to move versus the S&P 500 when the S&P 500 is stressed. As shown, Treasuries consistently have more upside exposure when the S&P 500 is down, and that’s a stable relationship. Gold, which used to be an excellent hedge asset, has now flipped and is likely to fall with the S&P 500 during large declines.

On the flip side, large rallies in the S&P 500 tend to see a positive beta for gold, while Treasuries maintain their negative beta. An argument could be made that while gold often falls when the S&P 500 does, it might be a more attractive hedge asset because it incurs a lower cost to holding if the hedge doesn’t end up being necessary. Click here to view Bespoke’s premium membership options for our best research available.

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