Gold hedging strategies for emerging markets


The World Gold Council posted a new report on gold as investor’s tool. Investors in emerging markets can use gold to reduce exchange-rate risk. This also benefits the cost efficiency. Exchange-rate risk is becoming more important for investors in developing economies. They are looking for foreign markets to diversify their portfolios and gain better returns.

The global economic condition has change over the past decade. The understanding of exchange-rate hedging has improved. The emerging markets growth and developed markets monetary policies created differences in the interest rate. This rose the common cost exchange-rate hedging.

Many investors leave their portfolios un-hedged, which brings great risks. That is in respect of the current trade-off between the costs of hedging and its benefits.

Currencies and asset prices are more vulnerable to price risks. That is why gold is a great asset and currency hedge. Investors with emerging-markets exposure should consider its characteristics.

Currency-based losses can be reduced by gold hedging. That way the opportunity cost won’t increase. Also the potential benefits of emerging markets investing won’t suffer.

The yellow metal has negative correlation to developed-market currencies like the dollar. But gold has a positive correlation to emerging markets growth. The commodity is a proven hedge against tail-risk. Also it has low investment cost compared to other foreign exchange hedges. All of this makes gold a good tool for exchange-rate hedging strategies.

World Gold Council’s report analyzes the cost of foreign-exchange hedging and its advantages. Gold-hedged portfolios with merging-market exposure have better performance.

Gold hedging has, higher returns lower cost and risk. Currency-based hedge and no exchange-rate hedge portfolios have worse performance.

In times of market stress and currency tail-risk the yellow metal gives optimized returns.

The report reviewed 8 periods of crisis conditions. The performance of gold in currency-hedging strategies of emerging-market portfolio was highlighted. It had 2.4% better performance than un-hedged portfolio and 1% better than currency-hedged one. Gold cover of emerging-market assets also reduced peak portfolio decline to 9.2%. Decline in currency-hedged portfolios was 12.5% while un-hedged one was 13.1%.

It is less expensive to build a gold hedging strategy. Currency hedges strategies emerging market currencies have higher cost. The average costs for emerging-market currency hedging is currently over 4%. Gold coverage has less than 50 basis points on borrowing costs. This report is mostly focused on emerging market investment and US currency hedging. Though, the data has larger area of application. Also it is relevant to other researches on gold hedging. New Frontier Advisors and Oxford Economics have similar reported findings. Now there’s a multi-resource data that must be reliable. 2 to 10% gold share is recommended for currencies, economic environments and risk profiles.


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