Gold volatility has been the global cross-asset outlier for quite some time now, with silver following closely behind. While gold and silver have historically been sought after as hedges against global risks, their current levels make them unattractive instruments for hedging. In this blog post, we will explore why hedging “global” risks via gold volatility is no longer a viable option and highlight more interesting alternatives for those looking to manage risk.

Gold Volatility: A Historical Perspective

Before diving into the reasons behind the unattractiveness of gold volatility as a hedging instrument, it’s important to first understand its historical role in the market. Gold has traditionally been seen as a safe-haven asset, with its price often moving inversely to global stock markets. This made it an attractive option for investors looking to hedge against risks associated with equity and bond markets.

However, over the past decade, gold volatility has become increasingly unpredictable and decoupled from traditional safe-haven assets. This is largely due to the unprecedented actions of central banks, which have flooded the global economy with liquidity and suppressed bond yields. As a result, gold has failed to maintain its historical correlation with risk assets, making it an unreliable hedge against global risks.

Interesting Instruments for Risk Management

So, if gold volatility is no longer a viable option for managing global risks, what are some other instruments that investors can turn to? Here are a few alternatives that have gained popularity in recent years:

1. Options on ETFs: Exchange-traded funds (ETFs) offer investors exposure to various asset classes without the need for direct ownership. Options on ETFs allow investors to hedge against risks associated with these assets, while also providing a way to speculate on price movements.
2. Futures Contracts: Futures contracts are agreements to buy or sell an asset at a future date and price. These contracts can be used to manage risks associated with various asset classes, including equities, commodities, and currencies.
3. Cryptocurrencies: With the rise of cryptocurrencies, investors have gained access to new instruments for managing risk. While still a highly volatile market, cryptocurrencies offer a unique opportunity for speculation and hedging against traditional asset classes.
4. Alternative Risk Premia Strategies: Alternative risk premia strategies involve investing in assets that are expected to perform well during times of market stress. These strategies can include long/short equity, macroeconomic, and currency-based approaches.