Portfolio Rebalancing – A Potentially Golden Opportunity
For a variety of reasons, gold is a widely-held asset class within investment portfolios. Many investors include gold in their asset allocation mix for its perceived ability to act as both a diversifier and as a potential store of value in times of uncertainty; these perceptions contribute to the concept of gold as a “core holding” in many diversified portfolios. Indeed, with the notable exception of Warren Buffett , 1 some of the investment community’s most distinguished names currently maintain investments in gold. 2 Like any investment, gold is subject to rebalancing or reallocation when its value relative to other portfolio components shifts significantly. Examining quarterly data from the beginning of 1976 (the year that gold started trading freely in the United States) through the quarter ended December 31, 2015, suggests that gold is overvalued relative to historical price relationships with the major agricultural crops of corn, wheat, soybeans and sugar. 3 In fact, at quarter-end December 31, 2015, the gold/corn ratio, defined herein as the number of bushels of corn an investor could buy with the proceeds from selling one troy ounce of gold, was 296 bushels versus a 39-year average value of 169 bushels. Gold investors attempting to maximize portfolio performance through disciplined quarterly or annual rebalancing may want to consider adjusting their gold holdings in tandem with their existing or anticipated agricultural sector portfolio investment mix. For example, the historical data for the gold/corn ratio suggests that a mean reversion 4 from December 31, 2015, levels of 296 bushels to the 39-year mean value of approximately 169 bushels of corn for each ounce of gold (bu/oz) could benefit an investor rebalancing gold for corn within their portfolio. Click to enlarge As illustrated in the chart above, at 296 bu/oz, the gold/corn ratio is approximately 75% above its nearly four decade average of 169 bu/oz. Hypothetically, if an investor sold gold and purchased corn at the current 296 bu/oz level, and the ratio subsequently retraced to its historical mean value of approximately 169 bu/oz, the investor would then be able to sell the corn and buy back 75% more gold than was originally sold to make the temporary reallocation from gold into corn. While the gold/corn ratio was historically above its 39-year mean at the end of Q4 2015, other major agricultural crops were also very near all-time historic highs for the same time period. Charts for the gold/wheat, gold/soybean, and gold/sugar ratios are shown below. The gold/wheat ratio was 80% above its 39-year mean value, the gold/soybean ratio was 77% above, and the gold/sugar ratio was nearly 47% above its historical 39-year mean average value. Click to enlarge Click to enlarge Click to enlarge The current availability of both futures contracts and futures-based exchange traded products for gold, corn, wheat, soybeans, and sugar makes rebalancing the gold and agricultural components within a portfolio easier than ever before. Investors and advisors need to make an assessment of the relative value of gold versus their other portfolio constituents, including agriculture, and appropriately adjust their allocations to suit their individual investment needs and objectives. 1 ” Why Warren Buffett Hates Gold .” NASDAQ 15 Aug. 2013: Web. October 9th, 2014. 2 Based on the 13-F filings for holders of the SPDR Gold Trust (NYSEARCA: GLD ) as of 12/31/15, and found using Bloomberg Professional, January 4th, 2016. 3 Analysis & corresponding charts were prepared by Teucrium Trading, LLC, using Bloomberg Professional, January 4th, 2016. All supporting detail available upon request 4 Mean Reversion : A theory suggesting that prices and returns eventually move back towards the mean or average. This mean or average can be the historical average of the price or return or another relevant average such as the growth in the economy or the average return of an industry. Additional disclosure: I have held in the near past, and may purchase in the near future, shares of DGZ as a proxy for short gold against my long agricultural holdings of corn, wheat, soybeans and sugar.