BTS Market View: Gold Offers Uncorrelated Return Opportunities in Volatile Market Environments

November 30th, 2022

 

For today’s investors, gold is often seen as a polarizing asset class. On the one hand, it may offer excellent returns over the long run, provides diversification benefits to a traditional portfolio, and it tends to act as a significant hedge against periods of inflation and market turmoil. On the other hand, it is an asset class that offers no cash flow yield, and experiences bouts of large drawdowns and stagnation. With this in mind, investors may wish to enjoy the benefits of gold while avoiding some of its drawbacks.

The chart below shows the performance of gold and the S&P 500 during a few recent periods when equities experienced a drawdown of 15% or greater from peak to trough. Gold outperformed equities substantially during each of these events, illustrating its value as a hedge against equity volatility.

Source: Bloomberg Finance, L.P., State Street Global Advisors. US Equity represented by S&P 500 Total Return. Gold: gold spot price in US dollars. Data from August 25, 1987, to September 30, 2022. Past Performance is not a reliable indicator of future performance. Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income as applicable.

But while investors would be happy to hold gold in their portfolio during these spikes in equity volatility, a subsequent reduction in market turmoil often leads to large drawdowns in gold which investors would prefer to avoid. The table below shows that since 2000, gold has offered attractive returns compared to both stocks and bonds while remaining highly uncorrelated to both asset classes. However, when looking at average drawdown and max drawdown, the volatility of gold looks comparable to that of equities.

Source: Morningstar Direct

Our BTS Gold Tactical Asset Allocation Portfolio is intended to function as a sleeve within a traditional stock/bond portfolio that may offer uncorrelated return streams during volatile market environments, while protecting on the downside in markets that are less favorable for gold. Since the inception of our strategy in January 2020 through the end of Q3 2022, the strategy has avoided many of the larger drawdowns in gold, while outperforming a buy-and-hold strategy, illustrated by the returns chart and accompanying performance table below.

Source: Bloomberg, Morningstar Direct

With our 40-year history of tactically navigating a variety of market environments, we’ve applied our proprietary, trend-following, technical analysis modeling process to the gold asset class to create a unique strategy that may serve a valuable role within a traditional portfolio. To learn more about our process and where it may fit into a portfolio, please reach out to your BTS Regional Director.

Disclosures

This commentary has been prepared for informational purposes only and should not be construed as an offer to sell or the solicitation to buy securities or adopt any investment strategy, nor shall this commentary constitute the rendering of personalized investment advice for compensation by BTS Asset Management, Inc. (hereinafter “BTS”). This commentary contains only partial analysis and, therefore, should not be construed as BTS’ general, complete, or most current assessment, projection or outlook with respect to the topics discussed herein. This commentary contains views and opinions which may not come to pass. To the extent this material constitutes an opinion, assumption, forecast or projection, recipients should not construe it as a substitute for the exercise of independent judgment. This material has been prepared from information believed to be reliable, but BTS makes no representations as to its accuracy or reliability. The views and opinions expressed herein are subject to change without notice. Returns for specific BTS portfolios are available upon request.

It should not be assumed that investment decisions made in the future will be profitable or guard against losses, as no particular strategy can guarantee future results or entirely protect against loss of principal. There is no guarantee that the strategies discussed herein will succeed in all market conditions or are appropriate for every investor. Investing in BTS portfolios involves risk, including complete loss of principal. General portfolio risks are outlined in BTS’ Form ADV Part 2A and specific strategy brochures, which are available upon request. Clients and prospective clients should review these risks with their financial representative before deciding to invest in BTS portfolios.

BTS GOLD TACTICAL ASSET ALLOCATION PORTFOLIO PERFORMANCE

Performance does not reflect actual client results, as the Gold Tactical Asset Allocation Portfolio was only available to the portfolio’s investment manager, BTS Asset Management, Inc. (“BTS”), and not to clients, prospective clients, or to the general public. Actual client results would have differed from the single tracking account based on, among other things, the inception date of the account, client-imposed restrictions, individual fee schedules, custodian fees, and individual security selection. The Gold Tactical Asset Allocation Portfolio investment objective and strategies have remained constant since inception.

BTS Asset Management, Inc. is not a Commodity Advisor or Commodity Pool Operator/Advisor. The portfolio does not invest in, and BTS does not, as part of this or any available strategy, recommend or provide advice related to instruments that are principally regulated under the Commodity Exchange Act, as administered by the Commodities Futures Trading Commission (CFTC). The portfolio does not hold, or trade instruments classified as Commodity Pools, commodity futures contracts, or in any other instrument primarily regulated by the Commodity Exchange Act. The portfolio only invests in exchange traded products that offer indirect exposure to precious metal sectors and that qualify as publicly traded securities. Investments are selected only if they disclose by prospectus that they will not hold or trade in commodity futures contracts regulated by the Commodity Exchange Act and that they are not classified as Commodity Pools. BTS is not registered with the CFTC and, therefore, is not subject to CFTC jurisdiction. Clients and prospective clients should note, therefore, that investment in the BTS Gold Tactical Asset Allocation Portfolio will not receive regulatory protections afforded to investors in products principally regulated by the CFTC.

The Gold Tactical Asset Allocation Portfolio invests primarily in exchange traded funds (ETF’s). ETF’s have their own internal expenses which are borne by clients.

Performance results are net of a maximum annual model management fee of .50%, applied retroactively. Actual fees vary depending on, among other things, the specific platform, custodian, portfolio size and applicable fee schedules. BTS’ fees for discretionary clients are available upon request. Performance results do not include any fees that may be charged by a financial representative, platform provider, or financial representatives' affiliated firm. The performance shown is net of the maximum third party UMA/SMA wrap program platform fee of .50% BTS charges for providing model portfolio signals to the platform sponsors for use in their clients' accounts. Because BTS does not supervise individual accounts on these platforms and does not have contractual discretionary authority, the maximum fee rate we charge is significantly lower than fees charged to full-service clients that come to BTS directly for receipt of discretionary advisory services. Therefore, the performance shown is not intended for use, distribution or discussion with clients and potential clients of BTS discretionary services.

The S&P 500 includes 500 leading companies in leading industries of the US economy and is a proxy for the total stock market.

The Lipper High Yield Index is an unmanaged index of the 30 largest high yield mutual funds based on total year-end net asset value. It assumes the reinvestment of dividends and capital gains, as well as management fees and expenses, but does not include any actual management fees or expenses associated with a fund.

LBMA is the London Bullion Market Association (LBMA), a London-based international trade association that represents the wholesale over-the-counter gold and silver market in London. The LBMA Gold Price PM is set in the London gold market at 15:00 GMT, in U.S. dollars, serving as a benchmark for pricing gold. It is widely used by producers, consumers, investors and central banks.

Bloomberg Aggregate Bond Index - An index used by bond funds as a benchmark to measure their relative performance. The index includes government securities, mortgage-backed securities, asset-backed securities and corporate securities to simulate the universe of bonds in the market. The maturities of the bonds in the index are more than one year.

The Bloomberg US Treasury Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury. Treasury bills are excluded by the maturity constraint, but are part of a separate Short Treasury Index. STRIPS are excluded from the index because their inclusion would result in double-counting.

ICE BofAML US High Yield tracks the performance of US dollar-denominated below investment grade corporate debt publicly issued in the US domestic market. Qualifying securities must have a below investment grade rating (based on an average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, at least one-year remaining term to final maturity as of the rebalancing date, a fixed coupon schedule and a minimum amount outstanding of $100 million. Also, qualifying securities must have risk exposure to countries that are members of the FX-G10, Western Europe, or territories of the US and Western Europe. The FX-G10 includes all Euro members, the US, Japan, the UK, Canada, Australia, New Zealand, Switzerland, Norway, and Sweden.

Correlation measures how two securities move in relation to one another based on daily returns. Average Drawdown is the average of yearly Maximum Drawdown based on daily returns. Max. Drawdown is the maximum observed loss from a peak to a trough of a portfolio, before a new peak is attained.

Consumer Price Index is a measure of the average change over time in the prices paid by urban consumers for a market of consumer goods and services.

*Index returns are for illustrative purposes only and should not be construed as BTS model performance or performance achieved by any BTS client. More specifically, any reference to index returns during isolated or defined periods in time is for reference only and is not meant to imply index returns are indicative of actual returns achieved in client portfolios. Investors cannot invest directly in an index, and index returns do not reflect management fees, custodial fees or brokerage commissions, which vary depending upon the custodian chosen.

Source: Morningstar (for index returns)

BTS Asset Management is affiliated with BTS Securities Corporation, member FINRA/SIPC. Securities are offered through BTS Securities Corporation and other FINRA member firms. Advisory services are offered through BTS Asset Management, Inc.

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.

BTS Asset Management, Inc. ("BTS") is an investment adviser registered with the SEC. BTS' website is limited to the dissemination of general information regarding BTS' investment advisory services. The information on this website is for general informational purposes only and should not be construed by any prospective or existing client of BTS as a solicitation to effect transactions in securities. In addition, the information on this website should not be construed by any prospective or existing client as personalized investment advice. BTS’ investment advice is given only within the context of its contractual agreements with each client. BTS' investment advice may only be rendered after the delivery of its Form ADV Part 2 and the execution of an agreement by the client or investor. BTS' Form ADV Part 2 describes BTS' business operations, services and fees and is available upon request. All information contained on this website is subject to change without notice. The information contained on this website may include forward looking statements which are based on BTS' current opinions, expectations and projections. BTS does not have any obligation to update or revise any forward looking statements. Actual results could differ materially from those anticipated in the forward looking statements. Past performance is no guarantee of future results.