To further enhance the risk return profile of our investment strategy, we have added gold to the investment universe making it the second commodity to feature, together with our oil allocation.
From 1975 when gold was free to float and daily pricing available it has returned some 4.8%pa with much volatility and many years trading below previous highs (notably 1980). In our model we expect gold returns of some 6% (before any leverage we apply) and without the huge drawdowns. It has achieved this by avoiding the market during the long declines but still capturing upside.
Governed by behavioural biases such as ‘herd mentality’, the responsiveness of gold to our sell-off, consolidation and recovery cycle has been high with a win ratio of 66%, sortino ratio of 1.5 and volatility less than 10%. As well as being a good source of alpha in terms of these ratios additional benefits are further diversification of our model incorporating a larger commodity component to complement the existing equity allocation. The result is a lower correlation to equity markets and no correlation to CTA trend following funds.