Gold is getting smoked! Here's how we deal with it

VTS Community,

Gold is getting smoked!  

As I've been talking about for the better part of 15 years now since I launched VTS back in January 2012, Gold is actually the 2nd best "safety" position.  I would say in the long-run XLU Utilities is the #1, although even that failed in 2022 so nothing is perfect.

Gold and Utilities though are #1 and #2 overall which is why we use those in our strategies.  Unfortunately, neither are without the occasional period where they can be very disappointing, and we are in one of those right now the last few days with Gold.  Damn!

2 year chart of IAU Gold:

Clearly in the last couple years Gold has been doing very well, and we've been in and out of it as a safety position in that time and have been very happy with it.  However, things are getting quite unpredictable the last couple weeks.

IAU Gold the last month:

Safety:  To exit or not to exit?

The first thing I always like to do when accessing performance of "safety" positions is to compare them to the alternative, which would be simply not shifting into safety right?  After all, the vast majority of the investing world are buy & hold investors and they never cycle out into safety.

Our Tactical Volatility Strategy is designed to move from Short Volatility SVXY during stable markets into IAU Gold when Volatility is elevated, because gold is far superior in that higher Volatility range.

Since we made our first exit to safety Gold on February 13th, we've only had 1 day where we weren't in Gold so this is pretty easy to calculate.

February 13th:  Buy IAU @ 93.70

February 25th:  Sell IAU @ 97.77

February 25th:  Buy SVXY @ 53.30

February 26th:  Sell SVXY @ 52.83

February 26th:  Buy IAU @ 97.64

Remember, our VTS performance is coming from the live fill prices in our public TOS account so there will be some small variation trade to trade depending on what time of day people executed.  Unfortunately we're all subject to the random noise of the market, but law of large numbers in the long run it should all balance out for everyone.  Here are those trades since we exited to safety the first time on February 13th:

* I'm writing this before the market opened and I do realize that gold is getting crushed again today, but let's at least calculate this all as of market close March 18th with official prices, which IAU was at 91.12

Performance wise, since we exited to safety on February 13th up to market close yesterday on March 18th, compounded geometrically because of course investment results compound on themselves over time:

Live performance since moving to safety Feb 13th:

10,000  *  4.34%  *  -0.88%  *  -6.68%  =  -3.49%

Now to compare that to the alternative of simply staying in aggressive positions, we officially sold SVXY on February 13th @ 52.84 which we could have technically just kept holding it without cycling to safety

SVXY closed yesterday on March 18th @ 46.78

This means SVXY is -11.47% over the same time period

Safety still "worked" 

Again, we don't know how things will settle today.  Gold has had some very ugly opens in the last few weeks only to see big reversals mid-day when people realize the market is even worse, so fingers crossed we get one of those.  However, as of market close yesterday on March 18th:

Moving to safety did save us 7.98% which is definitely still worth it

Why does it feel so devastating?

Investing is an emotional endeavor and recency bias plays a very large role in how we feel about our investments.  The last week or two will always be fresh in people's memory and it has been up and down to say the least with our Gold position.

Only a week ago things were going tremendously well with this recent move to safety with us being quite profitable while the market and the SVXY itself was going down. 

The plus / minus from moving to safety was well over 10% not too long ago, and now it seems it may be down to 3-4%.  Still positive, but recency bias makes it feel terrible.

Big picture is everything!

This is always true of course, but I feel now more than ever with the economy faltering, trying to view everything from 30,000 feet is extremely important.  Let's focus on 3 main points here:

1)  Gold is still a great safety position, despite the last couple days

As a systematic rules based investor, I have to focus on longer term trends and performance, not just short term fluctuations.  Gold has had periods of extreme disappointment in the past, to be honest far worse than we've experienced this week. 

However, on a risk adjusted basis exiting to safety Gold has been a phenomenal addition to the Short / Long Volatility nature of the Tactical Volatility Strategy.  

Cash works too if people prefer to just sit on the sidelines, but I'd rather suffer the drawdowns that occasionally come from Gold in order to boost the overall performance.

Looking at Gold signals only on 37% of trading days:

2)  Recency bias aside, the Tactical Volatility Strategy works

As a former professional golfer who lived for many years in the world where nothing but the number on the scorecard matters, I do find comfort in analytically focusing on the long-term rather than emotionally focusing on the short-term.  There is no return without risk, and unfortunately drawdowns come with the territory, but the benefit of patience is clear.

3)  Nobody knows the future, but it "might" be grim

This is not a doomsday prediction, but given that the vast majority of investors started within the last 10-15 years, there aren't that many people out there who have experienced a true recession.  Let me remind everyone, the markets do NOT always go up.  There have been periods in the past where the S&P 500 / Nasdaq spent 15+ years in a drawdown

In fact in the last 30 years, more than half of that time was in one 

Most investors have only seen a bull market, but my VTS portfolio is designed to be able to navigate a world where that's no longer the case. Whipsaw does get more annoying the more uncertain the future is, but the alternative is far worse