Absolute Return with Gold & Silver

Last week, I worked on sister strategy of the Absolute Return model to include Gold and Silver in the formula.  As most are well aware, the iShares 20+ Year Treasury bond ETF – TLT – is a safe haven asset, that turns against the investor as inflation takes hold and interest rates rise.  Gold is also a safe haven asset, but it also serves as a hedge against inflation.  The Nasdaq 100, or QQQ, is the best equity index an investor can have over the long term and Silver is a hybrid.  It is similar to Gold in the sense that it can be viewed as a safe haven asset, but it is also has industrial purposes and usually suffers more price volatility than Gold.

The following graph illustrates just how volatile Silver can be vs Gold ($Silver:$Gold, red line, presented as a ratio of Silver/Gold) and it is clear that any outperfomance in Silver has little correlation with the S&P 500.

silvergoldratio vs spx.png

To get a clearer idea of the individual relationships, the next two graphs are of Gold, S&P 500 and Silver.  It is abundantly clear that in precious metal bull markets, Silver (white line) outperforms Gold (orange), so much so that it surpasses gold at peaks in precious metal cycles.


What is abundantly clear, is that an ounce of Gold held in your account or safety deposit box has significantly outperformed the S&P 500 and Silver since 1971.


Now, let us compare my favorite equity index, the Nasdaq 100 Index (blue line) and see how it has fared versus Gold and Silver.  It is important to note that the Nasdaq 100 began in late 1985, therefore the data used for the model begins at that time.  Needless to say, it has provided significant outperformance.  The peak in the middle of the screen was the “DotCom” market bubble.


For more perspective, the following graph is of the performance of the Nasdaq Composite (blue), S&P 500 (green), Gold (gold) and Silver (white) since July 1st of 1976.  It is abundantly clear that the Nasdaq is a better representation of long term growth.


The million dollar question is how NOT to lose your shirt in market drawdowns.  More specifically, how does an investor know when to buy and sell the Nasdaq 100 and have exposure to Gold and Silver at appropriate times, as well as using the 30-Year US Treasury bond as a “Risk Off” investment.

I spent the better part of last week creating a mathematical model based on the original Absolute Return model, incorporating Gold and Silver into the investment strategy.  My sense as a macro analyst is that markets and economies are headed towards an important “Risk Off” scenario that requires exposure to Gold in addition to US Treasuries.  If I am correct, this model should not only shelter investors from the storm, but should provide positive returns as well.  In fact, when back-testing the model, it provided better risk adjusted returns that the base Absolute Return model.

Some data, based on historical returns since November 1, 1985:

Stats USBNDXGoldSilver

For more color as to periodical returns, here are the annualized returns for each decade since November 1, 1985:

Hist Rtn Comparo.png



In summary, here are the annualized returns since November 1, 1985 to July 15, 2016.

  • Absolute Return w/Gold and Silver               12.04%
  • S&P 500                                                                  8.21%
  • Nasdaq Composite                                              9.68%
  • US 30-yr Treasury Bond                                    3.38%
  • Gold                                                                         4.68%
  • Silver                                                                       3.97%
  • Platinum                                                                4.05%

Again, the purpose of Absolute Return is to provide returns that exceed passive investing strategies.  In addition, it is important to incorporate assets that shelter investors from downturns in the market, utilizing a mathematical model to reduce decision bias.  For sure, the model has to undergo periodic testing for correlations that may detract from original purpose, though the incorporation of precious metals adds a measure of “anti-fragility” (term coined by Nassim Taleb) to the model.  The exact proportions of Gold and Silver utilized in “Risk Off” and “Risk On” scenarios is a data point I would like to keep to myself for the time being, though I may consider sharing it at a later date.

Trade safely!



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