Gold is making headlines again, although it has been a pretty good performer for quite some time. Some of the attention comes about when any asset goes to new highs, but gold is also getting attention because of the Fed’s statement yesterday. A number of observers noted that Fed balance sheet expansion could lead to a weaker dollar and higher gold prices, while others, of course, disagreed. Since I am not an economist, I have no idea whose side to take in the argument, but gold has already made its decision.
Click to enlarge. Source: Yahoo! Finance
The problem with gold, from a portfolio point of view, is that it is a commodity. It’s never clear how to incorporate commodities into a strategic allocation, because sometimes commodities rock and other times they are terrible performers for years at a time. If they are included in a strategic allocation at all, they are typically included as a small 5-10% slice. In that small role, they can neither hurt you or help you much.
Tactical asset allocation does not suffer from this same problem. When commodities are strong, they are included in the portfolio; when they are weak, they are not. Our Global Macro separate account, for example, has held precious metals for most of the period shown on the chart above. That doesn’t mean we are gold bugs or that we have expectations about what the dollar or the economy will do. We own assets because they have powerful relative strength-and we will exit them unceremoniously as soon as that ceases to be the case. Asset class rotation allows a portfolio to have significant exposure to an asset class during times when it potentially can do some good, and tries to avoid exposure when an asset class appears to be dead money.
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