Here's why I don't use leveraged Gold (1x GLD vs 2x UGL)

VTS Community,

Great question here that's quite relevant considering how well our GLD Gold positions have gone the last month or so:

"Why don't you use leveraged Gold with UGL instead of GLD in the Tactical Volatility Strategy?"

Those of you who have followed my work over the years can probably anticipate my answer here, but it's worth stating directly just in case people are considering doing this.

- GLD is a 1x Gold ETF

- UGL is a 2x Gold ETF

Now there are certainly times when using leverage can be an advantage, and we already do that within the Defensive Rotation Strategy with the 2x Nasdaq QLD.  However, when we're talking about "safety" positions I just make it a policy across the board to never leverage any of them.

None of our safety positions use leverage

We don't seek to add leverage to Gold, Utilities, Real Estate, Bonds, or even Long Volatility.  There's two layers to our safety positions and I prioritize them in this order:

1)  Capital preservation.  Even if the safety positions only achieved a 0% long-term return in the form of Cash, that would be preferable to the alternative of staying in aggressive positions.  Remember, the times we move to safety are when Volatility is elevated and the stock market is far too risky to hold so it's absolutely vital to at least go flat during those periods.

2)  Capital appreciation.  Within the context of our tactical rotation strategies, all the safety positions do achieve a decent level of profit long-term.  Again, when the stock market is going down, historically speaking the safety assets I have chosen do perform reasonably well.

Here's the GLD Gold positions only within the Tactical Volatility Strategy

For positions being held on only about 35% of trading days, that's exceptional performance that nearly matches the S&P 500 buy and hold over the same time period.  Now the Tactical Volatility Strategy overall has made about 30% a year, but it's well worth it that our safety positions have contributed about 1/4 of that.

* Also worth noting, I can't tell you how many times people have told me in the last 6 or 7 years that Gold is a dead asset class and not worth using anymore.  Well, the performance of our Gold positions since 2018 begs to differ, and we've experienced that first hand in the last 5 weeks.

Safety is for safety, I don't risk large drawdowns

Despite the great performance of Gold as a safety position, adding leverage would just introduce the risk of larger drawdowns.  We can see in that chart above, the maximum drawdown of 28.96% is getting pretty close to what I would allow as a maximum.

When the stock market crashes, for the first few days there can be a "sell everything" mindset and we can definitely see even safety assets go down initially.  The reason they are safety though is because it usually doesn't take long for them to start performing as they should again. 

We can even see this pattern in a small amount with our recent move to safety starting on February 24th.

Now I would say overall it has pretty much been a slam dunk for the Tactical Volatility Strategy as far as navigating a difficult period the last 5 weeks.  Even still we can see the first few days our GLD Gold positions didn't do any better than SVXY.  Like I said, there can be a knee jerk reaction from the market to just sell everything.

Using leveraged safety positions would risk just making that worse, and they may no longer protect us at a time when we need it the most.  I would much rather just make slow steady progress during the worst market periods, and the only time we really go for it would be the rare times we use Long Volatility to capitalize on a true crisis.

Safety is safety, full stop.