New S&P index does dollar weakness with gold

Is this the start of a deluge of retail investor-oriented financial products looking to cash in on gold mania and a potential dollar crisis?

From Standard & Poor’s on Thursday:

Standard & Poor’s Launches S&P 500 Gold Hedged Index

Index to Serve as the Basis for new UBS Investment Products

LONDON, December 3, 2009 – With the returns of gold rivaling that of the U.S. equity market, Standard & Poor’s, the world’s leading index provider, announced today the launch of the S&P 500 Gold Hedged Index. The Index seeks to simulate the returns of an investment strategy which is long the total return of the S&P 500 stock market index and long gold futures contracts, allowing investors to participate in the returns of the US equity market while hedging against a decline in the value of the U.S. dollar versus gold.

Standard & Poor’s also announced that it has licensed UBS to create and launch investment products based upon the S&P 500 Gold Hedged Index.

“In a gold-hedged strategy, investors are seeking to eliminate the risk of U.S. dollar fluctuations and are therefore willing to sacrifice potential currency gains against gold,” says Liz Taxin, Director of Strategy Indices at S&P Indices. “By holding long gold futures contracts, investors stand to gain when the U.S. dollar loses value as expressed in the dollar price of gold.”

The S&P 500 Gold Hedged Index is calculated as a combination of a long S&P 500 position overlaid with a long position in COMEX gold futures. The hedge only protects against adverse movements in the relative value of the U.S. dollar, as expressed in the dollar price of gold. Stock market risk is not hedged in any way.

The results of a gold-hedged index strategy, versus that of an un-hedged strategy, vary depending upon the movement of the gold futures contract and the U.S. dollar. By holding long gold futures contracts, investors may gain when the U.S. dollar loses value as expressed by gold. Conversely, they may lose when the opposite occurs.

The S&P 500 Gold Hedged Index is rebalanced monthly to equalize notional exposure to equity and gold. The positions are rebalanced to equal weights on the day of rebalancing.

It looks like an almost pure play on (continued) US quantitative easing. You get to participate in a potential liquidity and stimulus-driven rally, while hedging yourself against the inflation/dollar weakness often associated with unconventional monetary policy, with that shiny metal (rightly or wrongly) .


Related links:
A Minskian roadmap to the next gold mania
- FT Alphaville
A forward curve proposition
– FT Alphaville
BNY Mellon’s fx team: Ultimately, buy gold
– FT Alphaville

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