Gold Currency Strategy

I recently looked at Logical Invest’s Gold Currency Strategy

Here is their summary:

  • The Gold-Currency strategy trades Gold ETF vs 3 major currencies.
  • It is based on the negative correlation between the Gold ETF and the U.S. dollar Index.
  • It is an excellent addition to existing equity or bond portfolios as it holds very little correlation to either.
  • It can be traded using ETFs, Futures or even low-margin/low-cost FX pairs.

It is always partly invested in gold and partly in the best performer (presumably on a momentum basis) between Long USD/ Short Yen, Long USD / Short Euro, Long USD / Short Australian Dollar.

The weighting scheme is the same as for their Universal Investment Strategy but it is unclear what parameters they used.

I used the same parameters as they recommended for the UIP:
Increment (for gridsearch) = 0.01
Lookback (days) = 73
Volatility Factor = 2.5
Risk free rate = 0.0

I rebalanced the weightings monthly.

I am deeply averse to fiddling with parameters to obtain better results and thus left these parameters well alone.

Logical Invest tested back to 2009 which did not suit my purposes at all so I took futures contracts to represent the currency pairs and spot gold right back to 1987. I did not add any interest on deposits, however neither did I include management fees.

The results were underwhelming over this period:

CAGR 4.69%  Max DD 41.84%

Very similar to the metrics for a simple buy and hold of spot gold.

I took exactly the same idea but used a more traditional Markowitz mean variance optimisation on the same portfolio using risk targeting (IE the highest return for the desired level of risk). I targeted risk as medium (10 on a scale of 1 to 20). Again I rebalanced monthly.

I got a much better performance:

CAGR 7.35%  MAX DD 23.58%

I am sure if I had fiddled with the UIP I could have improved the results.  But that is a curve fitting death trap.

Annualised standard deviation for both systems was around 15%.  I don’t have huge interest in this system although I can see it may have its uses as a portfolio “diversifier” so I won’t post the usual plethora of charts. Just the equity curve for my version of the system. The benchmark is spot gold.

goldcurrency

 

Categories:

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s