A stock market crash is generally thought of as a double-digit drop in a share index within a short amount of time, like a couple of days. Share prices have plummeted recently and unless things improve soon, a 2022 stock market crash could be imminent. With this in mind, I’m again revisiting gold as a hedge against any potential sharp declines.
Gold as downside protection
Gold can provide protection against a sudden market downturn. The price of this precious metal is largely seen as negatively correlated with stock prices. Often when the market collapses, investors flock to the asset as a safe haven.
It’s by no means a perfect investment as it does not generate any dividends, unlike high-yielding shares. This means investors are solely dependent on price appreciation for return. However, if the stock market crashes, I hope my gold holdings might increase in price. Even if the rest of my portfolio loses value.
Options for investing
There are several options for investing in this asset. For example, it can be bought from the Royal Mint or other precious metal brokers, but physical storage can be costly.
In my opinion, one of the easiest ways is through a gold exchange traded commodity(ETC). This is a fund tracking the spot price of gold, but that trades like a stock and can be bought and sold through most online brokers.
There are lots of gold ETCs available, but the one I’m holding is iShares Physical Gold ETC (LSE:SGLN), which tracks the gold spot price. It’s been going since 2011, is large in size (over £9bn) and has a low ongoing charge of 0.15%.
Outlook
In 2021, while the Footsie had its best performance in five years, this fund declined by around 4%. Being completely dependent on price rises for return means that would have made the ETC a poor investment last year.
That said, year-to-date it’s up almost 2% and I want to dig into this a bit more. At the start of the year as markets rose, the fund dipped. However, towards the middle of the month as stocks started their decline, iShares Physical Gold ETC started to rally.
At the time of writing, the flagship US index the S&P 500 is down almost 10% year-to-date. The tech-heavy Nasdaq is firmly in correction territory with a reduction of over 13% during the course of the year. Closer to home, the FTSE 100 has completely changed direction from a strong start to the year, to almost a 3% decline. With tensions between Russia and Ukraine mounting and the Federal Reserve meeting this week to announce plans for US rate rises, a sudden drop in share prices could be imminent.
Though nothing in investing is certain, I hope that iShares Physical Gold ETC will act as a kind of insurance policy against a 2022 stock market crash. For this reason, I remain comfortable allocating a small portion of my holdings to it.
