Article / 17 December 2013 at 9:53 GMT

Global Beta: Gold is getting closer to rebalancing

Peter Garnry Peter Garnry
Head of Equity Strategy / Saxo Bank

Global Beta continues to struggle with its performance as interest rates are adjusting to more normal levels. The headwinds will eventually disappear but for the meantime performance will likely remain soft. The portfolio has not been rebalanced yet but the relentless declines in gold mean that the metal is getting closer every week.

Gold is getting ugly
Is it all ending in tears? The gold bugs and believers in the end of the world scenarios were screaming for USD 5,000 price levels not so long ago. But the gold bubble is slowly being deflated due to rising stocks and real rates as highlighted by Saxo Bank's Teis Knuthsen two weeks ago. More importantly, overall trust in the financial system is increasing as evidenced by several indicators on the interbank and lending markets. 

Since the peak on August 22, 2011, gold is down 35 percent (see chart below — Gold ETF share price) and is critically struggling around some key technical levels. The downside risk is significant in 2014 if the global economy continues to expand. According to Teis Knuthsen's inflation chart, gold should go below 1,000 to get closer to long-term fair value.

Gold ETF (GLD:arcx) share price since 2008
Source: Saxo Bank

But what does it mean for Global Beta? Well, the strategy has a small position in gold currently at 5.54 percent which means that it is getting closer to the lower end of the trading band. Remember the portfolio has target weights with a plus/minus 20 percent weight band around the target. For gold the lower end is at five percent so if the declines continue the strategy will soon have to increase the position in gold back to the target weight.

Global Beta portfolio allocation
Source: Saxo Bank


Unique period since inception
As long-term US government interest rates continue to rise and emerging market credit continues to be decoupled from the increase in risk assets, the Global Beta is underperforming relative to the classic 60/40 portfolio. Global Beta is down 0.7 percent in December following a 0.5 percent decline in November. 

The period since inception is quite unique for Global Beta as the 12-month rolling return has gone below zero which is something the strategy only experienced during the financial crisis. The critical link to why performance has been absent is that commodities and emerging market credit have not increased in tandem with stocks which is normally the case in an environment with rising growth expectations.

Global Beta 12-month rolling return since inception including simulation
Source: Bloomberg and Saxo Bank




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