TBAR Offers Alternative Gold Exposure

August 13, 2013


Consider what this means to an investor near/in retirement: The value of her gold allocation has been largely preserved, and when the downtrend reverses, she’ll regain gold exposure to hedge against tail-risk events.

Here’s the crux: An investor in retirement doesn’t have the staying power (time, in this case) to stick with gold through its down-months (or years) but—perhaps more than anyone—needs the protection that gold has historically offered from extreme scenarios such as banking panics and currency crises.

TBAR has been effective since its launch in the beginning of 2011, and its backtested results are equally as effective.


I would be remiss if I didn’t discuss TBAR’s limitations, however.

TBAR is ineffective for long-term gold exposure. Investors with a long-term allocation to any asset class do so expecting it to appreciate. If that’s the case, why bother with TBAR’s process of exiting and then re-entering gold exposure?

For example, in the chart below, why bother exiting at Point A only to re-enter at Point B considering that the outcome is the same, but more expensive, than if the process never occurred?

Gold 200-Day SMA

In fact, it’s exactly this process that damages TBAR’s viability as a long-term instrument for gold exposure. When I backtested TBAR’s strategy through 2005, I found that nearly every time the fund exited gold exposure, it re-entered at a higher price (selling lower and buying higher).

TBAR’s other big limitation is that it’s an ETN. Attaining gold exposure via an ETN flies directly in the face of many who believe in the yellow metal. TBAR investors don’t actually own any gold and, worse, only get paid the returns on their investment if RBS is in a financial condition to make those payments—otherwise, “sayonara.”

Ultimately, TBAR isn’t a panacea of gold investing, nor would I promote it as a mainstream gold ETP. For the right person, however, TBAR offers a valuable product that does exactly what it says on the tin.

At the time this article was written, the author held no positions in the securities mentioned. Contact Spencer Bogart at [email protected] or follow him on Twitter @Milton_VonMises.


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