We note however that the Gold Producers Basket while producing the same annual return as gold in dollars showed 1.3% lower annual volatility in addition to an 8.4% lower maximum drawdown over the ten year historical period. This nicely illustrates how a basket approach can help to reduce volatility and drawdown risk.

As discussed in previous commentaries the lower volatility of the basket approach is partly a benefit of the reduced exposure to the dollar which has tended to spike in value during previous periods of high market stress, pushing down the prices of assets priced in dollar terms. By diversifying financing currencies investors are able to reduce exposure to the some of the idiosyncratic risks that drive the individual currencies such as the dollar. More generally, this re-emphasizes the potential benefits for medium to long term gold investors of reducing exposure the use of any single currency when making purchases which always leaves investors with a concentrated short exposure to the currency.

Source: Bloomberg, LP; Treesdale Partners calculations.
Gold Producers Basket – the price of gold expressed in an equally weighted basket of the currencies of the six largest gold producing countries (Australia, South Africa, Russia, Canada, USA and China); weekly rebalancing.
Past performance is not indicative of future performance.

The other interesting result to highlight in the table is the strongly negative beta of the gold price in Australian dollars, South African rand, Russian ruble and Canadian dollar terms versus the S&P 500 index. Beta is a measure of an asset’s systematic risk – in effect how much of an asset’s volatility can be ‘explained’ (is caused) by the volatility of the broad market. A beta of 1 indicates that the asset’s price will move with the market. A beta of less than 1 indicates that the asset will be less volatile than the market. A beta of greater than 1 indicates that the asset’s price will be more volatile than the market. A beta lessthan 0 indicates that the asset’s price volatility will tend to move in the opposite direction to the broad market suggesting that reducing dollar exposure may help to enhance the “market defensive” characteristics of gold.

20.14.5.15_gold pic 3
Source: Bloomberg, LP; Treesdale Partners calculations.
Gold Producers Basket – the price of gold expressed in an equally weighted basket of the currencies of the six largest gold producing countries (Australia, South Africa, Russia, Canada, USA and China); weekly rebalancing.
Past performance is not indicative of future performance.

Finally to get a better view of the portfolio effects of a gold basket strategy we chart the rolling two year drawdown of the Gold Producers Basket (GPB) and the rolling two year beta of the GPB versus the S&P 500 index. We note that in all instances the basket strategy showed lower or equal drawdown and lower beta versus the S&P 500, than gold priced exclusively in dollar terms.

1 “Can Exchange Rates Forecast Commodity Prices?” Chen, Rogoff and Rossi (2008), NBER Working Paper No. 13901

This article was written by Treesdale Partners, portfolio manager of the AdvisorShares Gartman Gold/Euro ETF (GEUR), AdvisorShares Gartman Gold/British Pound ETF (GGBP), AdvisorShares Gartman Gold/Yen ETF (GYEN) and AdvisorShares International Gold ETF (GLDE), share their thoughts about the gold space.

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