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QQQ x GLD – The perfect portfolio?

Take a look at this chart:

Gold in Blue, NASDAQ in Yellow. For reference, QQQ refers to a well-known NASDAQ ETF, and GLD refers to a well-known Gold ETF

If we ignore the dip during the peak of the Coronavirus lockdowns, both have experienced high double-digit returns for the year. The NASDAQ and Gold have returned around 30% Year to date – and it is only mid-August. For reference, the NASDAQ returned 37% in 2019 – and that was before the pandemic.

There has been this interesting correlation between Gold and Equities recently, with both rallying in risk on situations. To explain this, we should look at the principles behind the 60/40 stock and bond portfolios.

Old fashioned 60/40 stock and bond portfolio lagging behind

The fundamental premise behind a 60/40 stock and bond portfolio is that bonds are supposed to be the ballast for stock when they dive. Stocks retract in risk-off scenarios, demand for safe assets such as bond increase. However, with real interest rates at 0% or lower, yield in bonds has matched the return in holding straight cash – even falling behind with real negative yields.

However, recently we have seen that both Gold and Equities have been rallying in unison – with a pullback in stocks further pushes higher.

There has been a saying that diversification is the closest to “having your cake and eating it too” in investing. However, with the Coronavirus pandemic and current macro environment, this may be your best shot in hedging your portfolio while maintaining strong equity-like returns.

Is Gold a safe haven or a bullish bet in a portfolio?

We’ll take a look at the first half of the equation: Gold.

Two things have been fueling a push higher in Gold. First, many investors and traders believe that Gold is a safe haven with no actual fundamental basis. They think that Gold will rally when there are risk-off periods in the market. Therefore, inflows in gold increase when equities dip.

Secondly, many investors believe Gold is a good investment when inflation and bond yields are low. This is because they think that they may attain higher returns from Gold while retaining that “safe haven” status bonds have. Furthermore, there has been a historical correlation between a weaker dollar and a stronger price in Gold. Therefore, there have been constant inflows throughout the year as the dollar weakens, and inflation comes into question. We can see that inflation-protection trade in the lower bond yields for Treasury Inflation-Protected Securities (TIPS) – with the Barclays 1-10 year TIPS ETF up around 5.6% year to date.

Barclays 1-10 Year TIPS ETF gaining traction

NASDAQ being a staple in many portfolios

Now we have the NASDAQ. There is nothing new with the NASDAQ trade. FANG has dominated the rise in the Index, with everyone staying at home and using their services. It is important to note that Facebook and Google are operating using an advertising model that offers its services for free in return for advertisement eyeballs. That is why they have been able to rise to the top, beating analyst estimates during the Coronavirus pandemic. With fortress balance sheets, they, too, have turned into a safe haven trade while retaining their growth status.

Analysts might argue that this space has been an overcrowded trade and that soon we will see the switch into cyclical and value such as energy and financials. However, the difference between tech and value is that tech continues to generate free cash flow today. Financials and Energy (ehem. Oil companies) are having a harder time.

The pandemic has forced macro-economic conditions around the world, which have been the perfect breeding ground for the tech and gold trade. The pandemic has forced people into their houses, relying on technology to connect them with the rest of the world. Furthermore, the pandemic has also forced governments and central banks to implement drastic measures to keep the economy afloat. This has lowered the need for investors to have that bond ballast in their portfolio, as there are safer assets that thrive in the current financial macro environment we currently find ourselves in.

I can’t give advice on the articles I write. However, I can see that I currently hold both stocks in QQQ alongside a generous holding in GLD ;)

Anish Lal, a senior analyst at BlackBull markets, made an excellent technical comparison between the NASDAQ, Gold, and the U.S Dollar. You can watch it here.

Safe trading!

Ballast for the common stock portfolio - Bonds, Gold, or the USD?

A common portfolio weighting known amongst many investors is the 60% stocks, 40% bonds portfolio. The general idea being that stocks appreciate in a bull market, while bonds keep their value in a bull market. Therefore, if you were long 40% bonds, you would have somewhat had a ballast for the drop in stock price. As of late, however, we have been associating the words “safe haven” and phrases such as “investors flee to safety” with assets such as Gold and the US Dollar. Have bonds lost its relevance as ballast in a modern investor portfolio?

Does a low-interest-rate environment diminish the ballast effect of bonds?

Recession Fed Funds Rate
2020 – COVID 19 Pandemic (Feb – Present) 0.25%
2008 – Global Financial Crisis (Dec 2007 – June 2009) 0.25%
2001 – Dot com bubble (Mar 2001 – Nov 2001) 2.5%
1990-91 – Savings and Loan crisis (Jul 1990 – March 1991) 6.25%

The current fed funds rate is 0.25% - currently matching the lowest, it has ever been a post-global financial crisis in 2008. Recessions before that, however, had the Federal Reserve cutting rates to nothing as low as it is now or during the Global Financial Crisis. 

In short, pre mid-1990’s was where the strong negative correlation between stock and bond returns became evident. This was on the basis that accommodative monetary policy would bring interest rates lower, increasing the opportunity cost in owning bonds as opposed to leaving cash in a savings account. However, if you look at the table above, both in 1991 and 2001, interest rates were high enough for a real yield if you held government treasuries. But in our current environment and 2008? Real yielding safe government treasuries could not be achieved. Therefore, the opportunity cost does not spark as much interest in investors as they did back pre 2000’s, where high single-digit and even double-digit interest rates were present. 

Is having Gold as a Ballast currently paying off?

Performance of the US 10 Year in blue, SP500 in red, Gold in orange and the US Dollar in Teal

As shown by the chart, Gold has returned around 12% year to date, while treasuries have only returned 8%. You can see the markets working in reaction to economic events such as treasuries rising in March as the FED cuts rates and the real damage of the coronavirus pandemic becomes clearer. Furthermore, the inverse correlation between the USD and the price of Gold is present in the chart, with the exception being around mid to late March – where quantitative easing and fiscal spending give rise to concerns to the devaluation of the dollar. As we look into April and May, it is clear that Gold is currently outperforming treasuries, which would be more beneficial as ballast in comparison to Bonds in these circumstances. However, both are outperforming the US Dollar.

Is Gold a better ballast than Bonds in these low-interest-rate environments?

There is a likelihood that Gold will outperform Treasuries in this low-interest-rate environment. Given fiscal and quantitative easing alongside the demand for other currencies slowly increasing, it is likely we see the USD lower at the end of the year than at the start of the year. If the historical negative correlation between Gold and the USD rings true, there is also a high chance that Gold will end up higher at the end of the year.

Interest rates can only go so low. If the Federal Reserve lowers rates into negative territory, New debt issuance by the US Government will be hovering at nominal yields near 0% - with real yields most definitely being in the negative territory. This gives an implicit ceiling as to how high bond appreciation can go. Given a possibility for a second wave, risky assets may still be off the table for many investors. With Bonds providing next to 0% yields, investors may seek to look towards Gold as a source of capital growth instead of yield.

Our analysts here at BlackBull Markets, Philip and Anish,  have some excellent technical analysis on the future of Gold and the USD as the safe havens of the world. You can watch the Philips' Gold analysis here, and Anish's analysis here.