What’s Working In A Portfolio? Gold

August 08, 2014

It’s tempting to call for a commodity rally, but it’s hard to see past the ‘shiny.’

The latest hiccup in the market has everyone scrambling for the next counter-correlated asset class that will save their portfolio when the S&P 500 really decides to take a dive.

But is anything working?

I think the answer is likely in commodities, but in particular, gold.

I’ll fend off the criticism with a leading “what are you, crazy!?” chart. Here’s what commodities have done for you for the last five years:

Com5YR

Our Analyst Pick ETF, the PowerShares DB Commodity ETF (DBC | C-26) has been pretty terrible, leaving you essentially flat for the last three years while the equity markets have been on a historic rally.

But that’s not really the point of commodities in a portfolio. The point is to provide a little bit of diversification when things go wrong (which they really haven’t in quite a while). So with this latest little blip in equity markets, has anything changed?

ComYTD

The short answer is: a little. In the past few days, as equity markets have come down, we’ve seen a bit of a rally in DBC (that bottom line). But let’s be honest, its small recompense for the long-term bad call we’ve faced. And year-to-date? It’s been a pure money loser.

But gold, as most folks know, has been having a bit of a comeback tour lately, and is handily beating the S&P 500 and other commodity sectors. In fact, if we peel back the onion on commodities, and just look at the sector exposure, we see things more clearly:

 

comsectors

These are the four major sector ETFs in the commodities space: the iPath Dow Jones-UBS Industrial Metals Total Return ETN (JJM | D-85), the iPath Dow Jones-UBS Precious Metals Total Return ETN (JJP | C-83), the iPath Dow Jones-UBS Energy Total Return ETN (JJE | D) and the iPath Dow Jones-UBS Agriculture Total Return ETN (JJA | B-74). The only two sectors that are actually getting anything useful done this year are the industrial and precious metals. But really, the important point here is that commodities aren’t really a single asset class.

There’s no correlation between the awesome run-up agriculture had in the spring and the rather sad state of precious metals at the same time.

And really, why would there be? What does wheat have to do with silver?

So why do I think commodities—and specifically, gold—may be more interesting right now than they were over the last five years? Correlations.

One of the problems with gold and commodities in this long market cycle has been that they haven’t been particularly counter-correlated to equities. They’ve tended to go in the same direction—just a lot more slowly, and with greater drag from things like trading costs and contango.

But that’s changed. Take a look at the 30-day correlation of the broader commodities markets:

DBCCorr

Correlations are consistently the lowest they’ve been in years, and have run negative for much of the year. And look at gold (proxied here by the SPDR Gold ETF (GLD | A-100):

GLDcorr

Gold’s been counter-correlated to equities all year long. Every single day, all year long, the one-month look-back suggests gold is right where you want it, zigging when the market zags.

Does that mean it’s time to pile in? Of course not. But it does suggest that long-term asset allocation diversifiers who’ve been hanging on to gold or commodities may finally be doing so for the right reasons.


At the time the article was written, the author had a small, long-standing and maybe finally justified position in DBC. Contact Dave Nadig at [email protected].


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