It is a highly protective asset that helps diversify portfolio risk. It has a long-term statistical bias and is particularly tempting to place in a portfolio. By statistically analyzing the history of gold prices (1970 - today) we can consider ourselves in a position of extreme advantage at this time. Analyzing the past crises from 1974 (from the point of maximum to their minimum) to date, 6 major crashes are found for the gold market. The smallest reversal was 35% at the end of 1987, while the largest decrease in value was recorded starting from 1980, losing more than 70%, with an average drawndown of -47.5%. The ratio of drawdown to recovery period is around 1.5. Means that on average gold takes around 1.5 times the time it takes to recover value compared to the time it takes to lose it. Analyzing the declines that did not affect the trend reversal, we can see that in over 50 years of history, the declines that did not lead to trend reversals have had decreases in value that have never exceeded 30%. The price of gold has lost only about - 17% from its maximums, so for the moment we are well above the average level of historical reversal (-30%). Although the quantitative analysis in the past has an indicator of a probable trend reversal of the instrument in the future, the decrease in price from the maximums does not confirm the same direction (the price did not exceed -30% from the maximum reached in 2020), considering the situation extra ordinary (and still uncertain) for the world economy and the probability of new lockdowns, finding ourselves on a discount level of approximately -17% of the asset, I will proceed accordingly. Insertion of the asset class in the core department, finding the discount level interesting. Given past trends and the present period, gold will be positively affected in the event of continued uncertainty in the future economy. If the price should fall below the -30% level from the 2020 highs, we will proceed to close the position on the asset. Going up now considering the discount on prices brings us to an advantageous situation as it allows us to decrease the risk of our operation.
If we assume that we are close to a minimum level and that the long-term is characterized by a strong upward statistical bias, combined with the fact that the global economic situation is still far from an official recovery and that the Fed will have to wait a little longer before raising rates, positioning on $GLD is an excellent medium / long term opportunity for part of the core structure of my portfolio.
Let's analyze the data:
- Standard Deviation 10Y = 0.99%
- Standard Deviation 5Y = 0.85%
- Standard Deviation 3Y = 0.90%
The riskiness of the product decreased by about 10% from 2010 to today.
- 5Y yield = + 5.54%
- 3Y yield = + 12%
- YTD yield = - 1%
3Y Expected Return: + 30%
Max loss (with hedging): 5.60%
Max portfolio loss (in the event that the outcome of this core transaction does not go according to estimates):
% of equity to be dedicated to this operation: 10% of the total portfolio + 5% for any hedging = 15% of the total portfolio
Risk - Return = 1: 5.35
Over time, three different situations can arise:
A) Closing the long trade at a loss and closing the hedging in profit, then:
- Potential loss% on the portfolio: - 0.57%
B) Closing of the hedging at a loss and profit of the long operation, then:
- Potential gain% on the portfolio: + 2.37%
C) There is no need for the hedging strategy and the instrument meets expectations, then:
- Potential gain% on the portfolio: + 3%
Remember that this is my market vision and should not be interpreted in any way as an investment advice!