As impressive as this stretch of uninterrupted market gains has been, we all know at some point the party is going to end.  Our VTS Tactical Balanced Strategy has enjoyed the nice run up in stocks as well, but the VIX term structure has flattened out a bit and has forced us to move to IEF Bonds today.

 

You can learn more about the strategy by clicking here, but essentially it tactically rotates between positions in stocks, bonds, and gold.  Now I’ve talked in the past about how in my opinion, gold isn’t a very good stand alone buy and hold investment.

 

The reasons are many, but essentially it boils down to the fact that the price of gold is unquantifiable.

 

Given that such a small percentage of it is industrial use, there’s really no fundamental analysis you can do on it.  Price to earnings ratios, book values, discounted cash flow models, market share evaluations, net net calculations, none of these can be applied to gold.  It’s not like other commodities that are primarily for consumption, and therefore nailing down a “fair value” price for it is actually pretty hard.


But as a tactical position to move into when volatility metrics are breaking down and stocks are on the decline, it serves it’s purpose extremely well.  I showed a while back how much better gold performs as our bottom 25% of the strategy compared to just shorting stocks.  SH is a short S&P 500 ETF

 


So we love gold for that reason and it will always have a place in our VTS Tactical Balanced Strategy.

The long term correlation of gold to the S&P is about 0%

 

You’ve probably heard it said that gold is a “safe haven” asset for when the markets are on the decline.  But if the correlation is actually just 0% and not strongly negative, how can it be a safe haven?

Well the reason is, while it may not have a buy and hold negative correlation to the stock market, historically it does have quite a strong tactical negative correlation when the markets are crashing.  Here’s a few interesting charts that show how effective tactical allocations to gold can be:

 


The National Bureau of Economic Research  (NBER)  has declared 5 major recessions since we came off the gold standard in 1971.  As you can see, gold has at least held it’s own during those periods.  Now “recession” isn’t exactly a scientific term, but it’s not arbitrary either so that’s a good approximation for those down periods in the economy.  We may not expect fantastic performance, but traditionally it hasn’t declined much either during recessions.

 


Since 1971 there have also been 5 major S&P 500 drawdowns, and when measured from the original decline through the day of the eventual full recovery, you can see gold was what you could call a safe haven asset.

 


And look at how gold has done during some of the short lived but significant market scares in the last 30 years.  It does seem like for the most part, money flows out of stocks and into gold when fear rises in the markets.

So I’ve expressed my skepticism in the past for actually being able to quantify a fair value price for gold which is why I don’t think it’s a very good long term buy and hold.  But there’s no doubt it’s performance during the time when we need it the most  (market declines)  is exceptional, and it will always play a valuable role in our VTS Tactical Balanced Strategy.

 

Current VTS Total Portfolio Solution Allocations

25% VTS Tactical Volatility Strategy

50% VTS Tactical Balanced Strategy

25% VTS Iron Condor Strategy

VTS Conservative Vol Strategy  –  Optional replacement for lower risk tolerance investors

 

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