This past Friday (3/6/2015) was a difficult day for most portfolios that are long any major asset excluding the dollar index and volatility. Stocks, bonds and gold ETF declined. SPY was down 1.4%, TLT fell 2.2%, GLD (Gold ETF) also down 2.7%. We got some reactions from some of our subscribers asking if the models are failing, especially regarding the Gold ETF. So let's put things in perspective. Is this common? As you can see this is an outlier. It has only happened a few times in over 12 years that all, including Gold ETF fell. Well, let's ask another question. Is it often that both SPY and TLT fall the same day? On the other hand, the SPY and TLT declining on the same day is not uncommon. Let's say we panic, we think everything is going down and short on the next open. We cover the next day close. Over time, we lose money...not a good idea. Top pane: Price of 20 year Treasury ETF: TLT. Lower pane: Bakctest results starting with 100k. Now let's do the opposite. We go against our instinct and actually buy both SPY and TLT at the next day open. We sell the next day at the close. We see that over time this is a better strategy. Top pane: Price of 20 year Treasury ETF: TLT. Lower pane: Bakctest results starting with 100k. So what does this mean? Co-movement between equities and bonds are not uncommon. It does not mean that the basic correlation between the two assets has fundamentally changed. History shows that thinking something is wrong and selling is counter-productive. The idea is to have a long term plan and to follow it while paying less attention to short term movements, news, hype and emotions. It is possible that a model stops working. In this case, that would mean the fundamentals [...]
- The Gold-Currency strategy trades Gold vs 3 major currencies.
- It is based on the negative correlation between Gold and the U.S. dollar Index.
- It is an excellent addition to existing equity or bond portfolios as it holds very little correlation to either.
- It can be traded using ETFs, Futures or even low-margin/low-cost FX pairs.
In the past 20 years I traded nearly everything you can trade, including commodities. Since about 10 years, I have gone from purely emotional trading to systematical rule-based trading. Today, I don't trade anything anymore, if I cannot reproduce a positive backtest of my trading strategies. Today I stopped trading commodities, because it is very difficult to get good results with backtested strategies. My core investment strategy is the "Global Market Rotation Strategy", which I presented in my first Seeking Alpha contribution. This is a very good and safe strategy and also this year the return is already 28.4%. The only commodity I trade at the time is Silver. With Silver it is different. There is no way to include silver in a successful rotation strategy. Silver is much too volatile and it is much too easy for big investors or banks to influence the price. However, one thing I still think I understand is the value of something. I do not like value investing with shares, because shares can go to 0. With commodities it is different. Today you can buy silver for $22/ounce and we know that production costs are between $25-$30. Even if there is no shortage of silver at the moment, I think for a longer term investment silver is extremely interesting. No commodity ever remained for long time below production cost. With such a constellation the downside risk of the silver price is much smaller than the possibility of higher prices. The other interesting argument for a silver investment is, that silver is extremely cheap to buy. I am using a broker (Saxo-Bank) in Switzerland which allows you to trade silver like a Forex currency. I can buy nearly every amount of silver with extremely tight spreads and no initial margin is required. With [...]