Energy Commodities and Gold Strong: Gold's Role in Asset Allocation

02/26/2011 0 comments

Last week saw a typical volatile reaction in commodity prices during international turbulence: the violence in Libya was a major cause for energy commodities' ascent. It was believed that the uncertain situation in Libya, one of the major oil producers, would stress oil supplies. In the week, U.S. oil (USO) shot up 9.13%, energy ETF (DBE) gained 6.6%. 

Precious metals functioned again during such a volatile event: Gold (GLD) gained 1.46% while precious metal ETF (DBE) gained 1.76%. For more detailed performance update, please refer to here.

Assets Class Symbols 02/25
Trend
Score
02/18
Trend
Score
Direction
Silver SLV 44.61% 45.2% v
Agriculture DBA 18.17% 18.71% v
Energy DBE 17.3% 10.83% ^
Commodity DBC 16.74% 13.62% ^
Precious Metals DBP 15.56% 14.73% ^
Base Metals DBB 13.17% 13.41% v
Gold GLD 9.84% 8.93% ^
US Oil USO 9.09% 0.88% ^
Natural Gas UNG -13.96% -20.35% ^

The trend score is defined as the average of 1,4,13,26 and 52 week total returns (including dividend reinvested).

A natural question arises from such an event: going forward, are precious metals better positioned than energy commodities as hedges? We make the following observations:

  • Oil and other energy commodties, on the other hand, are very much tied to shocking events that may have concerns on their supply. They are more closely tied to short term political and geographical developments, making them very reactionary to such events. 
  • In the current environment, because of massive monetary stimulus by global governments, investors are conditioned by the fact that the world will eventually enter a high inflationary period (inflationary expectation, not current inflation). Paper currencies are no longer trusted. Such a belief makes precious metals (gold (GLD) or silver (SLV)) as sought after assets. They are more likely go up in any stressful future event. 

 In the following, we compared with the two portfolios that use a tactical asset allocation strategy. Both have broadbase commodity index DBC as a candidate fund. But one has additional gold GLD ETF. The MyPlanIQ Diversified Core Allocation ETF Plan Tactical Asset Allocation Moderate is one of the model portfolios in MyPlanIQ Diversified Core Allocation ETF Plan. The plan consists of 35 funds. It covers 6 major asset classes and 28 minor asset classes. The major asset classes it covers are US Equity, Foreign Equity, Emerging Market Equity, REITs, Commodity and Fixed Income.

Portfolio Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
MyPlanIQ Diversified Core Allocation ETF Plan Tactical Asset Allocation Moderate No Gld 14% 114% 8% 66% 12% 84%
MyPlanIQ Diversified Core Allocation ETF Plan Tactical Asset Allocation Moderate 16% 123% 9% 73% 13% 90%


From the above table, adding gold GLD to the commodity asset class adds extra 1% annualized return in the last 1, 3 and 5 years. It also enhances portfolio Sharpe ratios. 

Symbols: SLV,DBP,GLD,DBB,DBA,DBC,DBE,USO,UNG,SPY,QQQQ,IWM,MDY,EFA,VEU,EEM,VWO,IYR,ICF,VNQ,GSG,LQD,CSJ,CIU,HYG,JNK,PHB,TLT,IEF,SHY,SHV,BND,AGG,MUB,MBB,

Disclosure:

MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical. 



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