With so much volatility and uncertainty all over the world, worried investors – like me – are reassessing their portfolios. The impact that political decisions can have on a traditional investment – like stocks and bonds – is definitely cause for worry and a reason to seek safety in hard assets. Look at the Brexit vote in the United Kingdom in mid-2016.
The London stock market dropped significantly in the wake of the Brexit vote, plunging by nearly 9%. A report from Morningstar showed that worries over the Brexit referendum results prompted investors to withdraw £5.7 billion from UK equity funds in early July 2016. Also, against the U.S. dollar, the pound quickly dropped to its lowest level in more than 30 years.
Other European markets also dropped following the surprise result, with many posting larger losses than the London markets. Germany’s DAX index fell by nearly 7%, while the French CAC dropped by 8%. Stocks in Ireland closed with a loss of nearly 8%.
The flight to safety also caused bond yields to plunge to record lows across the globe, making it even harder for investors to get decent income. The government bond rally pushed yields on over $10 trillion in global bonds below zero, most notably the 10-year German bond yield – known as the bund – which spent three sessions in negative territory; for the first time in history. In Switzerland, the yield on the country’s 30 year bond turned negative for the first time ever.
When Brexit prevailed, there was volatility and a flight to gold as well. This resulted in a sharp rise in the demand for the precious metal, which drove gold to its highest price in more than two years. At one point, in the immediate aftermath of the Brexit vote, it surpassed the $1,358.20 milestone achieved on June 24, 2016. After all, hoarding gold is a centuries-old reaction in times of crisis, and the aftermath of the EU referendum vote was no different.
For anyone investing for retirement, exposure to the stock or bond market would have meant significant losses after Brexit. The addition of alternative investments – like gold – to a portfolio would have gone the opposite way of stock and bond returns. This would have delivered profits in a time of political turmoil and is therefore, one the most compelling reason why investors are choosing hard assets over traditional investments.