#35 S2N: Golden Cross vs Butterfly Strategy

Author

micksonmatch
April 05, 2024

In today’s issue:

  • Gold makes new all-time highs: the Golden Cross Strategy versus the Golden Butterfly?

  • I may be drinking a short black instead of my regular long black

  • Let me not be crude

  • Gold versus gold miners performance

Today’s Spotlight

Gold is currently making new all-time highs. I am pretty sure Peter Schiff is going apoplectic with excitement. All credit to him; he has thicker skin than a buffalo. He is usually right, but he is also usually very early, and while I am at it, he is usually very obnoxious with it.

We have discussed in a previous post the Golden Cross, which is a famous long-term trend strategy. The way the strategy works is that you go long when the 50-day moving average crosses above the 200-day moving average, and you go short (sell) when the 50-day moving average crosses below the 200-day moving average.

The strategy works very well with the SP500. The question is, does it work as well with gold? The short answer is no. As you can see with the Sharpe Ratio, it is basically the same as buy and hold.

While the Golden Cross strategy is very much a trading strategy, there is a portfolio management approach to investing that incorporates gold into the 60/40 classic portfolio we discussed earlier in the week. What this strategy does is invest 40% in the SP500, 40% in 10-year bonds, and 20% in gold. Some call it the Golden Butterfly portfolio.

If you look at the above chart, you will think that Benchmark SP500 kills the Golden Butterfly. However, the Golden Butterfly produces a Sharpe Ratio of 1.08, which is exceptional versus the SP500 of 0.54. What is clear to see is that the Golden Butterfly has an extremely small max drawdown and overall drawdown profile.

S2N Insights

I may be drinking a short black instead of my usual long black

I see there are 2 types of coffee futures. I have been reading that coffee has made new all-time highs. According to the International Coffee Organisation it has. According to the futures data on the CME it looks like this.

Let me not be crude

Apologies for my weak attempt at humour. While still a very long way off from its all-time highs, crude oil is quietly marching towards $100 a barrel. If oil keeps climbing, then the Feds job of putting a lid on inflation is going to become a lot more greasy (sorry a second attempt at humour – its Friday).

Gold performance versus Gold Miners

I have been wanting to check this data out for some time. It is very interesting. Gold Miners have always been the leverage play on gold. At least that was according to the common wisdom I was taught. Gold miners are negative for the last year while gold makes new all-time highs. Something is very strange, I don’t know what.

Performance Review

To learn a bit more about the Z-Score, which I use for the colour signals, read this blog post.

Chart Gallery