Allocation to Cash on the Rise—Could Gold Benefit Too?


Mar. 7 2018, Updated 4:45 p.m. ET

Caution regarding further equity market declines

According to a survey conducted by Bank of America Merrill Lynch (BAC), fund managers are cautious about further US stock market declines amid rising anxiety. The survey indicates a record jump in the number of investors saying that they are buying protection against a steep decline in equity markets in the next three months.

Also, 70.0% of surveyed investors say they believe that the global economy is in the “late-cycle” stage, which is the highest number of investors saying so since January 2008.

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Allocation to cash on the rise

Investors’ allocations to cash increased to more than 4.8% in February 2018, up from 4.4% in January 2018. As investors express concern that monetary and fiscal policies could impact the safest government debt, their allocation to cash has increased.

The survey also revealed that funds were rotating out of equities into cash. Their stock allocation declined to a net 43.0% overweight compared to 55.0% in January.

Global uncertainty

Investors seem to be expressing more concern given the higher US deficits and the recent tax cuts, which could further widen the deficit. Investors may be trying to play it safe in the event of any major market shocks.

These fund managers may allocate their cash to safe-haven assets such as Treasury bonds, the US dollar, the Japanese yen, and gold (SGOL).

Precious metals

Precious metals such as gold and silver have some intrinsic value. They’ve typically retained their value, especially in times of heightening uncertainty and crisis.

Increasing economic uncertainty could lead to further appreciation in the price of gold. This would benefit miners that are leveraged to gold prices such as Randgold Resources (GOLD), Harmony Gold (HMY), Eldorado Gold (EGO), and Alacer Gold (ASR). These stocks contribute 10.5% to the VanEck Vectors Gold Miners ETF (GDX).


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