Saturday, May 22, 2021

Does Paper Gold hedge against stock market corrections?

Gold is an unprintable zero-yield currency.  So it should do well when real interest rates fall, or when they are expected to fall.  Like in a stock market correction.  Lets check the behaviour of GLD in past corrections.

Since GLD's history only goes back to 2004, we start in 2008.  The chart below covers the the 17-month bear market from Oct 2008 to Mar 2009.  S&P 500 (the purple line) was down 55%, while GLD (the candlesticks) was up 40%.

It wasn't smooth. GLD had a vicious 7-month 1/3rd drawdown, followed by a swift 4-month 50% recovery, bringing it back to where it started the drawdown. 

Why did it fall?  Interest rates were falling throughout this period, but there was a pause from May to Sept 08, corresponding to GLD's fall:

Source: MacroTrends Federal Funds Rate - 62 year historical chart

Flat rates would have stopped gold rising, but why did it fall?  Probably due to the panic, with funds needing to liquidate anything they could.  No one knows, but the important thing is that it did.  How would you buy-and-hold or trade through this?

Next we have a series of smaller corrections.

  • A brief two-month 16% S&P 500 correction from May-June in 2010, shown by the dotted rectangle below.  GLD up ~3%.  Its too short a time for the chart to mean anything.  And this was within a wider multi-year gold bull market.
  • A more substantial 5-month 19% S&P 500 correction from May-Sept in 2011.  GLD was up 4%.  We can see GLD's big spike as the stock market corrects, but GLD's final red candle has it falling 9% in a week.  Excluding this fall, GLD was up 13%. 
  • Again, we can see how hard it is to trade or buy-and-hold.
  • After the above spike, gold entered a 7 year bear market.  We only get one stock market correction in this time, 3-month correction from Nov 2015 to Jan 2016.  GLD exploded when the market dived:
  • The 3 month 2018 bear market from Sept to Dec 2018.  GLD was up 3-4%, and a lot less volatile than the S&P 500 which was down 20%:

  • With hindsight, the above was the beginning of a new bull market in gold.  Which we may still be in now.
  • GLD fell with everything else in the 2020 crash.  It was down 7% vs the S&P's 33%.   With a maximum drawdown of 8%, it held up ok.


On average, GLD has risen during small corrections.  But not during large bear markets or liquidity crises.

I'm expecting a short correction in the second half of this year.  Like 2018 or 2015-16.  I'm thinking of going long gold.  The odds are on your side if you buy gold before a (brief) downturn.  But the charts above give some idea of the risks involved.  2015-2016 in particular shows how dangerous it can be to be early.

Friday, May 21, 2021

Selling My Trading Account

I'm now selling my trading account which made up around 15% of my assets:

I'm selling now because:

  • Hedgeye sees quad 4 next quarter.
  • Money inflows from the Treasury General Account will stop.
  • The market is too frothy.  Every man and his dog is in.  Shitcoins are flying as crypto will "change to world".  Headlines proclaim "Copper is the new oil"...where were all these guys in 2020?

Think I've got another month to sell.  Then I look to buy gold to benefit from falling growth.  Don't know how long that trade would last.

Longer term, I think the correction will be short, like Dec 2018.  I want to be in the market again.  Still in commodities for higher inflation.  I'm looking for new targets, plus sticking with the old ones:

  • Copper again, for electrification.
  • Aluminium, copper's only substitute.  It also increases energy efficiency (lightweight).
  • Oil.  Rising energy prices are the definition of inflation.  
  • Fertiliser, rising crop prices mean more planting for next year's harvest.
  • Maybe palm oil, it takes 4 years for newly planted trees to bear fruit.
  • Battery metals are tough, they are prone to substitution.
  • Met Coal.  Probably US based, to support infrastructure spending and re-indistrialization there.  Australian listed coal producers have too much thermal exposure.
  • Maybe evil thermal coal?  Would favour Indonesian producers, as they have a strong domestic market (unlike the US or Oz) and are best placed to export to Asia & India.
  • Uranium is hard to place bets on.  The small caps are losing money, and Cameco is too tame.
  • Crypto.  I like ETH, but they are losing market share from high fees and a clogged network.
Basically anything that can't be grown too fast or printed.