Gold & Green: Double or nothing?

Tell me if this sounds familiar; you’re at a party and when you tell someone you’re a trader, they ask you how that’s different from being a professional gambler?  Now after a certain amount of well-justified outrage, it’s easy to understand why some might think the line between the two is mighty thin, especially with broker trade tools involving bright and flashing screens not to mention articles online where experts declare how easy it is to make a fortune in volatile sectors like precious metals. But one recently launched gold fund has us wondering if some investors might be able to learn a thing or two from gamblers.     

Undoubtedly, the precious metals space is the one sector of the market where the line between investing and speculation is thin, something long-term gold investors (or speculators depending on who you talk to) have come to learn to their deep regret. Gold came out of the Great Recession with infinite promise; a decade of strong performance captured the market’s attention and the rise of exchange-traded funds offered a cheap and easy way for an anxious public to invest in it for the first time.  But since 2012, when the world didn’t end as promised and investor confidence returned thanks to infinite quantitative easing (QE), gold and the miners have drastically underperformed, as billions fled the sector.

Enter the SPDR Long Dollar Gold Trust (GLDW), the first new gold fund launched since the recently closed AdvisorShares/Gartman series in 2014 and which follows the same basic philosophy. Those funds, the largest being the AdvisorShares Gartman Gold/EURO ETF (GEUR), were designed to offer long gold exposure utilizing a currency other than the U.S. dollar, allowing traders to short another currency, which typically has a strong correlation with the dollar. Think of it as two trades in one fund, which could allow traders to mitigate their losses, if the dollar strengthened and gold weakened like in 2015 when GEUR was down 2.1% while the SPDR Gold Trust (GLD) was down nearly 11%, or rake in ever bigger profits, if the dollar and gold managed to move higher together like in 2016 when GEUR was up nearly 11%, almost 300 basis points higher than GLD.

That rare confluence of the dollar and gold moving higher at the same time was the likely genesis of GLDW, although unlike the Gartman series which tracked one currency, GLDW offers long gold and dollar exposure using a basket of major foreign currencies including the euro, yen, Canadian dollar and Swiss franc.  Now any gambler will tell you that you need to know the odds before sitting down at a table, something we wanted to test as even GLDW’s fact sheet points out the dollar and gold typically travel in opposite directions, so we ran a quick exercise by looking at how often gold and the dollar (here measured against a basket of our largest trading partners) have a positive correlation although they could have a positive correlation in the event both were losing money like last June.

Using weekly data from the Federal Reserve Economic Database, we measured the rolling 12, 20 and 26-week correlations between the two going back to May of 2008 and found that even in the shortest window of 12 weeks, gold and the dollar only had a positive correlation roughly 20% of the time, which drops to a mere 11% when you shift to the longer 26-week window.  Investors needing a demonstration should consider GLD’s summer rally when it went from $115 in early July to over $128 by early September, a 10% advance while GLDW’s exposure to a falling dollar kept it to more restrained 5% gain (see “Taking the green out of gold”).  A long-term position in GLDW might result in smaller losses if gold continues to underperform, but traders considering a gold play could end up leaving a lot of upside on the table with this fund if the dollar and gold continue their historic relationship.