Over the full 20 year period, gold in euro terms was 24% more volatile when trending higher (above the200 day moving average) than when trending lower. Removing the short dollar exposure from the gold position and financing the gold purchase in euro increased the amount of volatility in the gold price as the price trended higher. And in three out of the five 5 year sub-periods we looked at, volatility was also higher in up-trending markets.
So what are some of the implications of these results? Firstly, in equity markets there may be some benefit to reducing exposure during periods when the market is ‘trending lower’ (however that trend may be defined) as these periods tend be associated with significantly higher volatility in prices. We noted that the biggest daily moves (either up or down) tended to happen when markets are trending lower.
While reducing equity market exposure in a down trending market might reduce the ability to capture some of the large daily up moves, more importantly, it might enable the investor to avoid some of the large drawdowns associated with falling markets. In gold we observed the reverse pattern; and from the point of view of an investor looking to hold gold as a defensive asset there may be some benefit to assessing the strength of the trend in the gold price as a way to potentially quantify the benefit to adding gold exposure to a portfolio during periods of market stress.
In other words there may be some signaling information to be mined from price trends in equity and gold prices which can help to optimize portfolio weight decisions. The key point to stress then is that the benefit from observing price trends is not so much on being able to better forecast future market direction but rather to assess the probabilities for increased price volatility (either upwards or downwards) and to make appropriate adjustments to portfolio weights.
This article 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.