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As we all probably know by now, the UK has voted to leave the European Union and Brexit is the word on everyone’s lips. Stock markets around the world reacted sharply and over US$2 trillion was wiped off global stock markets just 24 hours after the news broke. Markets have rebounded slightly since but the volatility is unlikely to ease in the near future as uncertainty looms over Europe.
Investors have traditionally used gold as a hedge whenever stock markets panic. And unsurprisingly, gold prices immediately jumped 6.3% to US$1,336.66 per ounce as investors fled to the asset as a safe haven amid all the doom and gloom.
Chart: Bullion Vault
While gold might be a great hedge during volatile markets, it makes for a bad investment when its returns are compared to stocks and bonds over the long term.
|Total returns (including dividends)||5 years||10 years||20 years||30 years|
|MSCI Emerging Markets||-20.8%||46.3%||180.8%||694.1%|
|JPM Global Bond||6.4%||48.7%||153.2%||421.2%|
|U.S accummalated inflation||9.2%||38.2%||56.2%||121.5%|
Data as at 31 Dec 2015. Source: Truewealth Publishing
In other words, if you think that investing in gold will make you rich, the evidence suggests otherwise. But if you’re looking for a way to hedge against market volatility, then gold can be very useful.
Of course, if you’re looking to buy gold, you don’t actually have to buy physical gold bars (although you could…); it makes more sense to simply buy a gold ETF. So here are two gold ETFs you can consider if you want to hedge against the Brexit uncertainty:
The full effects of Brexit remain to be seen and it will take at least two years for the UK to formally exit from the EU. In the short term, no one exactly knows how global markets will react as more news emerges of Britain’s withdrawal. Markets could continue to fall or the panic could be short-lived as investors adjust to a post-Brexit world.
In the meantime, if you’d like to stay away from all the uncertainty, then gold might be the best way to hedge against the market volatility.