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Gold has a long and well established reputation as a hedge against market and political risk. But does the precious metal live up to its image as good hedging vehicle? Bloomberg’s “MacroMan” columnist Cameron Crise, a former portfolio manager, has answered the question by putting the power of the Bloomberg terminal database to work.

Crise used the CBOE Volatility Index (VIX), known as the “fear gauge,” as a measure of stock market risk and tracked it against the spot price of gold from 1990 to 2015. The analysis showed a “highly significant” correlation between a rise in the volatility index and an increase in gold. Crise also conducted the analysis on a year-over year basis and again found that “the VIX appears to be a significant driver of changes in the gold price over a meaningful period of time.”

To get a closer look, he then reviewed ten turbulent periods in the markets over the past three decades, focusing on the peak to trough decline in the Standard and Poor’s 500 Index. During each of those time frames he calculated the returns on stocks, Treasury bonds and gold. On average, the Standard and Poor’s 500 Index lost nearly 20 percent during each period, while gold climbed almost 7 percent, posting a positive return in 8 of the 10 episodes. For example, during the global financial crisis, the S&P 500 fell nearly 55 percent; gold, meanwhile, climbed more than 25 percent. During the month following the 9/11 attacks, the stock market, as measured by the S&P, skidded 22 percent; gold rose more than 16 percent. More recently, when worries about a slowdown in China triggered a 12 percent drop in U.S. stocks from August 2015 through February 2016, gold rose 11.5 percent.

Finally, the Bloomberg columnist tested the benefits of diversifying an investment portfolio with gold. He compared a 60 percent/40 percent mix of S&P 500 stocks/Treasury bonds with a 55/35/10 mix of stocks/bonds/gold over the last three decades. The diversified portfolio that included gold outperformed the mix of only stocks and bonds by 55 basis points a year (.55 percent), a substantial difference when measured over 30 years.

Crise admits he had been skeptical of gold’s hedging power, but after running his analyses he concluded, “Given the solid performance of a portfolio including gold and the chance that the comfort of owning some might prevent investors from panicking at the height of a crisis, I have to conclude that the notion of gold as a hedge against serious risk aversion is true.”

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