Gold: What is it Good For?
While I do not agree with everything that is in this post from Charlie Bilello over at Pension Partners it is worth a read. There are some interesting facts on how including gold has impacted different general portfolios.
Click here to visit the Pension Partners website for more articles.
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In a world increasingly focused on the short term, five years can seem like an eternity. How many among us would stick with an investment that has gone nowhere for five years? That is precisely the question Gold investors are faced with today, with a return of -7.4% over the past five years.
The case for buying Gold five years ago was seemingly obvious. The Federal Reserve was embarking on a second round of quantitative easing and continuation of 0% interest rates. This was supposed to lead to higher inflation, a collapse in the U.S. Dollar, and increased demand for the “other” currency: Gold.
Fast forward five years and we have seen continued central bank easing, not only in the U.S. but across the globe. While we did see inflation in housing and stocks prices, what we did not see was a collapse in the Dollar or a spike in reported inflation. We also did not see an increase in the demand for Gold.
The past five years have not been a straight line, though. Gold prices initially surged higher in 2011 and money flowed in as investors chased returns. For a brief period of time the SPDR Gold Shares ETF (GLD) stood as the largest ETF in the world. Since then, Gold prices have fallen (-36%) and assets in GLD have fallen more, declining over 65% from their 2011 peak.
So the answer to the above question about how many of us would stick with an asset that has declined over the past five years is … not many.
Still, there remains $27 billion of assets in the Gold ETF, not a small sum. Those sticking with the yellow metal today argue that Gold is not just an “inflation hedge,” but also acts as an insurance policy of sorts. It is supposed to provide an uncorrelated alternative to stocks that proves valuable during times of stress.
Fair enough. There has been no stress to speak of in recent years and thus no need for any uncorrelated exposure or diversification in hindsight. But eventually we will enter another volatile period in equities where gold will prove valuable – or so goes the argument.
Let’s examine this thesis, looking at the period from 1976 through today.
First, Gold is indeed uncorrelated to stocks, with a monthly correlation of .02 to the S&P 500. Second, it has acted as a hedge on average with a -7.7% down capture to the S&P 500, meaning it tends to rise when the S&P 500 falls. During months in which the S&P 500 has finished lower, Gold has risen 53% of the time.
Lastly, introducing Gold into a stock portfolio has also improved risk-adjusted returns (return/volatility). A 60/40 portfolio of Stocks and Gold slightly underperforms Stocks alone (9.5% vs. 10.7%) but does so with lower volatility (-11.9% vs. 14.9%) and lower drawdowns (-29.9% vs. -50.9%) than an all-stock portfolio (see Table 1).
Based on these stats, a reasonable case can be made that Gold can add value to an all-stock portfolio. But this conclusion is one made only in isolation, failing to consider other competing investments. Gold is not the only asset class with a low correlation to equities that can mitigate volatility in a portfolio.
There are also Bonds. Since 1976, the Barclays Aggregate Bond Index (AGG) has a correlation of .22 with the S&P 500 and the Merrill Lynch 15+ Year Treasury Index has a correlation of .07. Both bond indices have a down capture ratio that is more negative than Gold (-10.0% and -15.9%) with a higher percentage of positive returns during down months for the S&P 500 (61% and 55%). They also tend to perform better during up months for the S&P 500, with up capture ratios of 22% and 21% versus 16% for Gold.
An additional factor favoring Bonds over Gold is their lower volatility. A portfolio of Stocks and Bonds produces a significantly higher risk-adjusted return than a portfolio of Stocks and Gold (see Return/Vol in Table 3 below). Adding Gold to a portfolio of Stocks and Bonds seems to add little additional benefit other than a lower correlation profile to the S&P 500.
Note: At Pension Partners, we use Bonds as our defensive position in our absolute return strategies for all of the above reasons. Bonds have provided a more consistent defensive alternative to stocks during periods of market stress with lower volatility and drawdowns than Gold. In our research on Treasuries (click here) and Lumber/Gold (click here), we illustrate tactical strategies that use bonds as the default position when equity volatility is expected to rise.
Gold, What is it Good For?
In the past forty years, Bonds have been the better alternative than Gold for investors seeking to minimize drawdowns and lower volatility in their portfolios. Bonds also throw off an income stream while Gold yields nothing. Does that mean Gold is good for absolutely nothing, having no place in a portfolio?
No. The future is not the past and anything could happen in the next five years.
Should we see high inflation and rising interest rates as we saw during the 1970’s, Gold would likely prove beneficial in a portfolio. If the U.S. Dollar were to experience a sharp decline, one would also expect Gold to perform well.
Handicapping these scenarios is not an easy task and I certainly wouldn’t recommend trying. The real questions for Gold investors are about staying power, discipline, and asset allocation.
1) Staying Power: How long are you willing to wait for Gold to prove its worth? Gold is down over the past five years which already seems like an eternity. Would you be willing to sit in Gold for twenty-seven years with flat returns as we saw from the peak in 1980 through 2007? Not likely.
2) Discipline: Gold is prone to sharp spikes higher and dramatic moves lower. Do you have the discipline to resist buying Gold after a spike and selling Gold after a crash? This is true for any asset class but given the higher volatility of Gold it is a particularly important question.
3) Asset Allocation: Assuming you have staying power and discipline, what is the appropriate sizing for Gold in a portfolio?
There is no easy answer to this question and really comes down to 1) whether you view Gold as a better diversifier and equity hedge than Bonds and 2) what your expected returns are for Gold versus Stocks and Bonds.
As outlined above, Gold hasn’t been a better hedge or diversifier (on average) than Bonds in past forty years. On the second question, there is a strong case that can be made that equity and fixed income returns will be below average in the coming years considering today’s high valuations and low bond yields. This should increase the odds of Gold holding its own as compared to the early 1980’s when equity valuations were low and bond yields were high. That said, even if Gold performs well in the next five years, it’s likely to be a volatile ride. Which is why for most investors staying power, discipline, and sizing may actually be more critical than returns.
This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
CHARLIE BILELLO, CMT
Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of three award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors previously held positions as an Equity and Hedge Fund Analyst at billion dollar alternative investment firms.
Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.
Oh yes there is…GOLDEN NUGGETS.
Check it out…
http://www.youtube.com/watch?v=mRC0xKjHTls
Sorry couldn’t resist. Warning…Some foul (bird) language . he..he..he….he. 🙂
HH……..INSTEAD OF jade helm…………check out KANSAS CITY SHUFFLE……over at FSN……great article concerning GUN RIGHTS and a switch a roo……..by OBAMA…..
ARTICLE BY CHRIS CAMPBELL………….
watch your step………the concrete seems to be crowded with a herd mentality….. 🙂
Oh yaa…like I Said Frank…my outlook has not changed.
I will check out that article on FSN. THANKS.
This is THE PLAN..SHTF….This is going to be
horrible. No doubt in my mind.
Huge crash is waiting in the wings.
Martial law..definitely. Dog Duty..everywhere.
People will be understanding this by late August
if they have any brain cells.
In fact, it could really get bad anytime.
No date setting but its coming 100 percentile.
Gold may start a rally after the middle of July.
First 2 weeks of July will be down. Don’t see a 1000 gold though
Still analyzing conditions and looking ahead.
NWO…so its all very precarious.
Definitely going into a world government.
Need to brace ourselves. IMHO…no bluffing.
TPP EQUALS NWO………………….
Russia stands in the way of NWO.
Advance to 9 or 15 minute mark on the video.
http://www.youtube.com/watch?v=DeZmiFntg0s
This is fresh off the wires. Its a dire situation.
Also goes into the bond market..gold.
HA…ITS ALL CORRUPT AND RIGGED.
More confirmations. ..so its all luciferian
globalist agendas. NWO..is here.
This catastrophic collapse. ..is…GUARANTEEEEEEEEED !!!!!!!!!!!
Anyone who doesn’t see this coming in blinder than a bat.
I’m long gold. Posted and time stamped. Went long GG, NEM and ABX.
All systems are go. Looks good for a short pop till end of June.
LONG AND STRONG.
I posted over the weekend to buy miners above. You bought this week
on the lows you should do very well.
IMHO…do your own D&D not investment advise.
HH…..Thanks for the tape, and info…….the system stinks……..TPP, the Middle class is one more step closer to the grave.
I think this commentator is living in an alternate universe ? He is clearly not a man who has studied history as he assumes the next 27 years is going to be like the last 27 years and it will take a quarter of a century for gold to move up lol?? There are 18.2 Trillion reasons why the next years will look nothing like the last 20 years. If you like there are 1.4 Quadrillion reasons why the next major market dip is probably the last one for this current Ponzi scheme we call the financial system.
Hunker in da Bunker…party is over.
The world is going into cardiac arrest.
Its assured and guaranteed. 100%.
AGREE………………HUNKER DOWN……..
TPP……………MAYBE, since this is a trade with ASIAN PACIFIC, ….Maybe the Chinese have decided to trade the BONDS for a fast track guarantee without military intervention. OOTB……….OUT OF THE BOX……….KANSAS CITY SHUFFLE INTERNATIONAL………..
REMEMBER …….NO ONE GETS TO READ THE BILL……….I think I read , some of the info is hidden for FOUR YEARS……………….HANG UM HIGH………..
TPP……….TREASON PER POLITIANS………….
Its time to run to the remote place now.
RFID chip will be required. TPP..passed…
Looks like I’m not going to be posting any longer.
America was sold to the world governance.
https://www.youtube.com/watch?t=61&v=hCGsUTQBx-c
Its over. O controls everything. America is finished as predicted.
Very sad time. Ready now for Gods Kingdom. Unless one takes the chip.
REMEMBER there is no mention of the US in the end times…………the moron public has given in ………..ignorance of all the issues…………sad but true……….
Yes, and many say because America is destroyed.
We are done anyway. Very very sad.
Well, Gods Kingdom is millions of times better.
The challenge is to get to point B without too much pain.
Many will take the chip. I’m on the red list and on my way out.
Meet ya at the door…………………
Funny….Here’s whats alarming though.
The sheeple will not believe whats coming
even though TPP passed.
And not only that they will gladly take the chip.
Its going to get real crazy soon.
They started with the chips in the dog………so the public will be like dogs……..
Technocrates…have all the technology to
control the world now.
REVELATION 22:7 & 10-11
Yep, need to prepare now. You seem to be ready.
The churches are still in the dark and have done
nothing. They let evil prevail. Completely dumbed
down.
Medium income to 4500$.
America wasteland.
http://www.infowars.com/tpp-endgame-turn-america-into-a-third-world-wasteland/
You also, seem to be ready……..stand strong………the arrows will be coming….
GALATIONS 5:13
Yes, stand strong.
Time to drink the water of life.
Fleshly desires will be all trouble.
TRY THE KJV………it is a better version……closer to the truth……..jmho
but, the last line is still the same……….
I just grabbed that online. Your a sharp cookie.
The RFID chip is in Obamacare. It was all held
up in the supreme court yesterday.
Gay marriage is coming up now.
Katie bar the door. This world is sbout to puke.
you can say that again……….
People better get a handle on the Constitution themselves….and a little history, or we are done for……………
We are done Frank. Its over. FINITO.
All hope is now lost.
There is no more constitution.
We are signed on the world
governance.
They will make our decisions.
Huh…you don’t see this.
AS of today…….HH….YOU ARE CORRECT…………THERE IS NO CONSTITUTION…….
Sovereign society says to go dark and withdraw activity
online.
This is farewell. Looks like I’m shutting down.
Good news for all the tamaguchi’s here who
will be taking the chip. Not me.
Time to exit here…stage left.
do you have a link………
You must be a member. Sorry nothing online.
If people can’t see whats coming now
posting here is a waste of time.
Its the walking dead. Don’t want to be
exposed to it. Zombitized !!!
The door is not closed yet,,,,
Maybe not yet but we are going past the point
of warning.
Its here. It could happen any moment.
Besides most people will refuse to see.
All efforts are now being exhausted.
How many times can the same people
refuse the truth. Its hopeless.
The ones who are waking up is Excellent
because they are not refusing to see.
Those that refuse to see are a waste of time.
Like I said they will gleefully take the chip.
I have no more mission here.
WELL said……….if I do not hear from you again it was a real pleasure sharing the word with you….
Thanks and was a great pleasure sharing
our thoughts and fellowship.
Last couple weeks I have been on edge
because its time to hunker down for real.
Not gone yet and thanks for the farewell
but I really won’t be posting much longer.
Its hunker in da bunker..for real.
Look at the comments on the board.
Its all about profits. They have no
interest in whats coming.
If they woke up, and knew what was
coming they would not be concerned
with profits.
So, its pathetic and a waste of time.
They will continue in this frame of
mind till the very last day before
destruction.
You never know , who is reading…..and might be on the edge.
Even Paul at the very end only had a couple of friends around………
Paul was a real trooper.
He even offered to go
to hell for others sins.
BIG BIG HEART.
Plus, its annoying to them.
Anyway, its time to sign
off to this zombie crowd.
Waste of time.
No one said it would be easy……………
Ha..Ha…you’re dead on regarding that.
I have to prepare too. Have an offer to
go here soon to a remote cabin.
Many things on my mind. Sovereign society
warnings.
People need to get going here soon. I’m one of them.
This is hunker down time. No bluffing around.
Greetings.
For those who are opened minded…..
I’ve had a good meeting with what I consider one of the best fund managers there is.
He went BEARISH on commodities in 2011. While people were calling for the end of the USA 2 years ago..He went Bullish as hell on Car sales and Home building ect in the US 2 years ago. BINGO…. While nobodies always right but his track record of 17 years says he is….
THE USD will continue to rise and the economy improves. Interest rates will follow albeit very slowly….
Canada is becoming more socialist every day so run for the hills on that one….No major rally in gold and ESPECIALLY IN Commodities…So if you would like to follow all the pumpers that have been WRONG OVER AND OVER be my guest…..Bobbo Moriarty is a one trick pony as I mentioned and if he was as doctor operating on you there would be an 85% chance of DEATH….
He has an advertising site. If you like gambling and not investing by all means!
I’m in the remote place and the Dow
Cow goes to 25000. Gold is at 3000.
Business is booming and real estate
is flying.
This is what the dreamers want to
hear.
Will it happen. SURE !!!! Ha ..if it did
the crash would be much greater.
POOF…IN A NANO SECOND 🙂
POSTED above…………THERE IS NO CONSTITUTION…….you are correct…….as of today
May as well meditate on anarchy. Its here.
Sadly, we are done. They handed the keys
to the shop over to the evil NWO.
This is the end game and its going to get
extremely ugly. America is finished.
Lazy Joe six pack thought he could just
kick back.
Also, I can tell you no one cares. So with
that bring said the nation is toast.
I think the DOW gets a correction at some point….no 25K or $3k gold.
There nothing flying just muddling…The realestate is coming back. Joe six pack is starting to buy…lots of home starts and is great for MANY jobs / business’s. That goes back into the economy FAST…. The USA is the best looking Pig period…
Joe better read about the TPP…….if he gets a 30 yr mortgage , he will never make it to the end. Of course , if you get a house on wheels , I guess that will count as lodging the poor.
You are correct about ,real estate and Joe, they are starting again the new LOWER DOWN PAYMENT PLAN…….will help Joe stay in DEBT.
btw………I posted yesterday…….AFFORDABLE RENTS…….zerohedge article concerning Rent to income, the article also shows each state and the amount of income it takes just for normal rent………This could be a factor for the switch from Multi-housing to single family…..just another cycle in real estate.
Zero Hedge NEVER made anyone a dime…
Your looking at insignificant issues. Canada’s rent makes US rent look like its on the kids discount menu. People figure out a way or don’t. You can’t predict an economy the way these guys do. You may read and listen too what you want to believe?
Surprises are to the upside in the US.
That is what I like …SURPRISES…….
I hate surprises.
I discussed gold with JFT and he believes the will be no major rally in Gold.
Bitcoin has a better chance of surviving the future as currency because whether we like it or not we are going cashless and are pretty much there.
I’m not arguing with the man that went against Sprott and then Old E Sprott CRASHED AND BURNED!
NOTHING HERE………………….JMHO