Gold can be frustrating, but I'll still use it

I'm going to remain patient and hold the Gold line

In yesterday's blog  (click here if you missed it)  I showed the long-term performance of Gold as a safety position which has been very solid for the better part of 15 years now.  Of course in the last week, it's been incredibly disappointing, which has led to a few emails wondering whether it would just be better to be in Cash.

Now of course you can use Cash in place of any of our safety assets if you feel it better matches your risk tolerance, but there's three main reasons why I'm personally going to just stick to the system as is: 

1)  Performance is best with Gold as safety

This isn't an opinion or a guess, it's just numbers.  Again, we can just look at a chart and despite recent disappointment it's pretty easy to see how valuable Gold is to the strategy long-term.

It's often tempting to judge something as broken when you're right in the middle of one of the underperformance periods, that's natural.  Regardless of which stock or ETF you hold, when it's doing poorly our cognitive biases will be working overtime to convince us that it's time to change.

This is why I'm always assessing things from the 30,000 foot view, because it's the only way to break out of that doubt loop and see things for what they actually are.

2)  The overall system works great

Having multiple tactical strategies each with their own asset classes for Aggressive, Safety, and Tail Risk positions has been successful for a very long time and I have no reason to change anything.

• Mid-Low Volatility:  Stocks with leverage and Short Volatility
• Mid-High Volatility:  Gold, Utilities, Real Estate
• High Volatility:  Cash, the CAOS ETF, Long Volatility

That Volatility Targeting works very well long term and it's the foundation of my portfolio.  However, there are times when the global macro picture lines up in such a way that safety positions don't actually outperform the market.  Gold, Utilities, Real Estate, the CAOS ETF, and even Long Volatility can lead to drawdowns when they don't live up to their historical averages.

The most obvious example of that was in 2022.  The stock market was down a lot, but so were all the safety assets.  However, since we'll never know ahead of time when one of those periods is going to happen, the only solution is to fall back to the law of averages and maintain the system that works most of the time.

3)  Gold is very valuable to the global economy

To not have at least some exposure to it in one of our three strategies seems like a lost opportunity to me.  I think it's entirely possible that several countries around the world will continue to accumulate Gold as a means to reduce reliance on the US Dollar and perhaps backstop trade agreements.

There's no denying, gold can be very frustrating and it can go through periods of very bad performance.  On a buy & hold basis it has had stretches of drawdowns that lasted over 10 years!

The good news is, we're not buy & hold investors and we can use our Volatility Targeting to only be holding it about 30% of the time and those periods are only when Volatility is elevated.  We can significantly reduce the drawdowns to a manageable level and still benefit from the importance of Gold as an asset class.

Our Gold positions only vs Gold buy & hold since Jan 2012:

* We've kept most of the performance but cut the drawdowns in half

The bipolar nature of Gold

It's one of the very best safety asset classes in the world, and it's also one of the most frustrating to trade given its unpredictability.

If I were to make a change to how we deal with safety, it would not be by ditching Gold in the Tactical Volatility Strategy.  It would instead be with switching out IYR in the Strategic Tail Risk Strategy.  Not saying I'm going to do that, but if there was a change to be made, I think that would be the most appropriate given the current difficult market environment.  To be continued...