Description of Gold-Currency Strategy II

The Gold-Currency Strategy II takes advantage of the historically negative correlation between gold and the U.S. dollar. It switches between the two assets based on their recent risk adjusted performance enabling the strategy to provide protection against severe gold corrections due to dollar strength. It is an excellent addition to existing equity or bond portfolios as it holds very little correlation to either.

This strategy is an update to the original GLD-USD strategy that uses inverse leveraged ETFs which are not permitted in some retirement accounts.

Statistics of Gold-Currency Strategy II (YTD)

What do these metrics mean? [Read More] [Hide]

TotalReturn:

'Total return, when measuring performance, is the actual rate of return of an investment or a pool of investments over a given evaluation period. Total return includes interest, capital gains, dividends and distributions realized over a given period of time. Total return accounts for two categories of return: income including interest paid by fixed-income investments, distributions or dividends and capital appreciation, representing the change in the market price of an asset.'

Which means for our asset as example:
  • Looking at the total return, or performance of 26% in the last 5 years of Gold-Currency Strategy II, we see it is relatively greater, thus better in comparison to the benchmark GLD (20.5%)
  • During the last 3 years, the total return, or increase in value is 10.5%, which is smaller, thus worse than the value of 20.4% from the benchmark.

CAGR:

'The compound annual growth rate isn't a true return rate, but rather a representational figure. It is essentially a number that describes the rate at which an investment would have grown if it had grown the same rate every year and the profits were reinvested at the end of each year. In reality, this sort of performance is unlikely. However, CAGR can be used to smooth returns so that they may be more easily understood when compared to alternative investments.'

Applying this definition to our asset in some examples:
  • The annual return (CAGR) over 5 years of Gold-Currency Strategy II is 4.7%, which is greater, thus better compared to the benchmark GLD (3.8%) in the same period.
  • Compared with GLD (6.4%) in the period of the last 3 years, the annual performance (CAGR) of 3.4% is lower, thus worse.

Volatility:

'Volatility is a statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security. In the securities markets, volatility is often associated with big swings in either direction. For example, when the stock market rises and falls more than one percent over a sustained period of time, it is called a 'volatile' market.'

Applying this definition to our asset in some examples:
  • Looking at the 30 days standard deviation of 8.5% in the last 5 years of Gold-Currency Strategy II, we see it is relatively lower, thus better in comparison to the benchmark GLD (12.9%)
  • Compared with GLD (10.7%) in the period of the last 3 years, the volatility of 7% is lower, thus better.

DownVol:

'Downside risk is the financial risk associated with losses. That is, it is the risk of the actual return being below the expected return, or the uncertainty about the magnitude of that difference. Risk measures typically quantify the downside risk, whereas the standard deviation (an example of a deviation risk measure) measures both the upside and downside risk. Specifically, downside risk in our definition is the semi-deviation, that is the standard deviation of all negative returns.'

Which means for our asset as example:
  • Compared with the benchmark GLD (12.9%) in the period of the last 5 years, the downside deviation of 9.5% of Gold-Currency Strategy II is smaller, thus better.
  • Compared with GLD (11.1%) in the period of the last 3 years, the downside deviation of 9% is lower, thus better.

Sharpe:

'The Sharpe ratio was developed by Nobel laureate William F. Sharpe, and is used to help investors understand the return of an investment compared to its risk. The ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk. Subtracting the risk-free rate from the mean return allows an investor to better isolate the profits associated with risk-taking activities. One intuition of this calculation is that a portfolio engaging in 'zero risk' investments, such as the purchase of U.S. Treasury bills (for which the expected return is the risk-free rate), has a Sharpe ratio of exactly zero. Generally, the greater the value of the Sharpe ratio, the more attractive the risk-adjusted return.'

Applying this definition to our asset in some examples:
  • The Sharpe Ratio over 5 years of Gold-Currency Strategy II is 0.26, which is larger, thus better compared to the benchmark GLD (0.1) in the same period.
  • Compared with GLD (0.37) in the period of the last 3 years, the ratio of return and volatility (Sharpe) of 0.13 is lower, thus worse.

Sortino:

'The Sortino ratio measures the risk-adjusted return of an investment asset, portfolio, or strategy. It is a modification of the Sharpe ratio but penalizes only those returns falling below a user-specified target or required rate of return, while the Sharpe ratio penalizes both upside and downside volatility equally. Though both ratios measure an investment's risk-adjusted return, they do so in significantly different ways that will frequently lead to differing conclusions as to the true nature of the investment's return-generating efficiency. The Sortino ratio is used as a way to compare the risk-adjusted performance of programs with differing risk and return profiles. In general, risk-adjusted returns seek to normalize the risk across programs and then see which has the higher return unit per risk.'

Applying this definition to our asset in some examples:
  • Looking at the excess return divided by the downside deviation of 0.23 in the last 5 years of Gold-Currency Strategy II, we see it is relatively larger, thus better in comparison to the benchmark GLD (0.1)
  • Compared with GLD (0.35) in the period of the last 3 years, the downside risk / excess return profile of 0.1 is smaller, thus worse.

Ulcer:

'Ulcer Index is a method for measuring investment risk that addresses the real concerns of investors, unlike the widely used standard deviation of return. UI is a measure of the depth and duration of drawdowns in prices from earlier highs. Using Ulcer Index instead of standard deviation can lead to very different conclusions about investment risk and risk-adjusted return, especially when evaluating strategies that seek to avoid major declines in portfolio value (market timing, dynamic asset allocation, hedge funds, etc.). The Ulcer Index was originally developed in 1987. Since then, it has been widely recognized and adopted by the investment community. According to Nelson Freeburg, editor of Formula Research, Ulcer Index is “perhaps the most fully realized statistical portrait of risk there is.'

Using this definition on our asset we see for example:
  • The Ulcer Ratio over 5 years of Gold-Currency Strategy II is 4.45 , which is lower, thus better compared to the benchmark GLD (8.82 ) in the same period.
  • During the last 3 years, the Ulcer Ratio is 2.99 , which is smaller, thus better than the value of 5.54 from the benchmark.

MaxDD:

'Maximum drawdown measures the loss in any losing period during a fund’s investment record. It is defined as the percent retrenchment from a fund’s peak value to the fund’s valley value. The drawdown is in effect from the time the fund’s retrenchment begins until a new fund high is reached. The maximum drawdown encompasses both the period from the fund’s peak to the fund’s valley (length), and the time from the fund’s valley to a new fund high (recovery). It measures the largest percentage drawdown that has occurred in any fund’s data record.'

Using this definition on our asset we see for example:
  • The maximum DrawDown over 5 years of Gold-Currency Strategy II is -10.1 days, which is higher, thus better compared to the benchmark GLD (-19.7 days) in the same period.
  • During the last 3 years, the maximum DrawDown is -6.4 days, which is greater, thus better than the value of -13.8 days from the benchmark.

MaxDuration:

'The Drawdown Duration is the length of any peak to peak period, or the time between new equity highs. The Max Drawdown Duration is the worst (the maximum/longest) amount of time an investment has seen between peaks (equity highs). Many assume Max DD Duration is the length of time between new highs during which the Max DD (magnitude) occurred. But that isn’t always the case. The Max DD duration is the longest time between peaks, period. So it could be the time when the program also had its biggest peak to valley loss (and usually is, because the program needs a long time to recover from the largest loss), but it doesn’t have to be'

Which means for our asset as example:
  • The maximum days under water over 5 years of Gold-Currency Strategy II is 605 days, which is smaller, thus better compared to the benchmark GLD (741 days) in the same period.
  • Looking at maximum time in days below previous high water mark in of 299 days in the period of the last 3 years, we see it is relatively smaller, thus better in comparison to GLD (352 days).

AveDuration:

'The Average Drawdown Duration is an extension of the Maximum Drawdown. However, this metric does not explain the drawdown in dollars or percentages, rather in days, weeks, or months. The Avg Drawdown Duration is the average amount of time an investment has seen between peaks (equity highs), or in other terms the average of time under water of all drawdowns. So in contrast to the Maximum duration it does not measure only one drawdown event but calculates the average of all.'

Using this definition on our asset we see for example:
  • The average days under water over 5 years of Gold-Currency Strategy II is 187 days, which is lower, thus better compared to the benchmark GLD (278 days) in the same period.
  • Compared with GLD (100 days) in the period of the last 3 years, the average time in days below previous high water mark of 87 days is lower, thus better.

Performance of Gold-Currency Strategy II (YTD)

Historical returns have been extended using synthetic data.

Allocations of Gold-Currency Strategy II
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Allocations

Returns of Gold-Currency Strategy II (%)

  • Note that yearly returns do not equal the sum of monthly returns due to compounding.
  • Performance results of Gold-Currency Strategy II are hypothetical, do not account for slippage, fees or taxes, and are based on backtesting, which has many inherent limitations, some of which are described in our Terms of Use.