Bridgewater ‘Tweaks’ Risk Parity Model, Moves Into Gold As Bonds Get More Risky
"Is risk parity dead?" probably isn't the right question. In the same vein, "the end of 60/40" likely isn't the best way to frame a discussion about the future of multi-asset portfolios in a world where it's hard to see bond yields falling much further. But if we eschew language that suggests an existential crisis is in the offing, we can ask a series of very reasonable, very timely questions about the viability of risk parity and the correlation assumptions that underpin it. I've asked (and a
16 thoughts on “Bridgewater ‘Tweaks’ Risk Parity Model, Moves Into Gold As Bonds Get More Risky”
“The first is just that gold is an inert hunk of metal that doesn’t actually do anything.”
The majority of the world’s population has believed the opposite for thousands of years.
Gold serves as an alternative store of value, particularly for those in emerging economies, and doubles as a source of personal adornment, particularly for females, more than half the global population.
Why change now, particularly in this global currency devaluation competition?
From GMO’s current quarterly letter:
“No discussion of the investment implications of inflation would be complete without addressing gold. For a valuation-based investor, gold presents some real difficulties. There is no yield or cash flow from the asset, making any type of valuation all but impossible. The most compelling case for gold is one based on opportunity cost. Gold has delivered an approximate zero percent real return over the last several millennia (quite impressive for an asset that produces no cash flow). If you assume the real return for gold is going to be zero, you can own gold rather than other negative real yielding bonds. In our traditional portfolios, we would prefer owning higher-returning Liquid Alts and Value strategies.”
The letter suggests moving from Treasuries into IL bonds, and “metals needed for clean energy: copper, lithium, nickel, vanadium, etc.”
To learn what GMO’s “liquid alts” are you’ll need to be a client: $5 million minimum. That leaves me out…
Gold’s value is a historical accident. If humanity reset, we might just as easily choose some other “store of value”. There are all manner of metals (and other substances) that are finite. Many of them serve actual, real purposes other than “personal adornment”. There is nothing you can do with gold if you survive a nuclear apocalypse, which is the ultimate irony in gold as a doomsday hedge. It would be the most useless thing you could possibly have in a literal doomsday scenario. You can’t eat it, you can’t burn it, it’s not great for building, and in the absence of a market economy or some kind of rationale for why people would want to store value (and there is no such rationale in a real doomsday scenario, where day-to-day survival is all that matters) it has no value at all. None.
And by “do anything” I mean it has no internal rate of return. That isn’t disputable. It’s a fact. Gold is therefore not an “asset”, really. It’s a portfolio hedge.
And have people so quickly forgotten how quickly gold sold off along with everything else in March?
Lack of real return on gold is why I (and my pal Warren) prefer gold miners to the metal. At least those stocks have a small yield to cushion vol. Silver has some industrial uses, so it’s an option to consider.
I think this is the point of confusion often. The dictionary definition doesn’t require an internal rate of return for something to be an “asset”, it just has to be useful or valuable. In that regard it cannot be argued that gold or fine art are not “assets” and yet when considering investment this internal rate of return comes up. In finance even inventory on hand is counted which for some manufacturing could literally be raw gold or silver. I am still not entirely sure where the asset definition integrates the internal rate of return aspect. I do not doubt that someone has decided that but it makes the language fairly muddy to just jump to that new definition.
Personally I agree with your assessment, H, through an economic science as it were. I just wanted to acknowledge, highlight, and emphasize that there is a powerful sociological phenomena and valuation quotient that has accompanied gold through the millennia, as well as offer hypotheses as to why. Perhaps the ingrained beliefs and valuation aspects within gold also find themselves in the development and behavior within organized religions…?
And now we have bitcoin, … and tulips a few hundred years ago…? … Kellyanne Conway’s “alternate facts…?,” … Trumpism … maybe some similarities within all these …?
I also keep coming back to a quote attributed to Einstein about flags being proof the human beings are herd animals…also seems relevant to this conversation.
Now time for my nightly Breaking Bad episode … I’m midway through season 4.
Glad to see Jane doing well.
Bleach would be valuable in a doomsday scenario.
Right. Although bulky, it’s a bit lighter than gold – and you can drink it!
Ammo may be a more useful store of value in a crisis.
Ammo provides zero nutritional value. Actually, the opposite is true for the recipient. Jail, regret, guilt and sorrow accrue to the giver in a crisis.
Unlike fine wine or gemstones, ammo does not increase in value with age. Its value lies in a dubious peace of mind, corrupted by imagined scenarios of attack and violence.
Thoughts of violence attract the same.
In a true meltdown/crisis where southern/rural Americans refuse to accept a Trump loss, ammo will be a valuable asset that can be traded for food and other necessities.
Count me among those moving into SWBI and VSTO until the end of November at least.
Their A/D, RSI and PPO lines are falling. Quite overbought. Maybe distribution ongoing.
extremely dumb dumb question but when folks are actually referring to an investable “dollar”, what are we talking about here. The DXY? 90 day t bills? ST repos? etc