For a variety of reasons, gold is a widely held asset class within investment portfolios. Many investors include gold in their asset allocation mix for its perceived ability to act as both a diversifier and as a potential store of value in times of uncertainty; these perceptions contribute to the concept of gold as a "core holding" in many diversified portfolios. Indeed, with the notable exception of Warren Buffett,1 some of the investment community's most distinguished names currently maintain investments in gold2.
Like any investment, gold is subject to rebalancing or reallocation when its value relative to other portfolio components shifts significantly. Examining quarterly data from the beginning of 1976 (the year that gold started trading freely in the United States) through the quarter ended March 31, 2016, suggests that gold is overvalued relative to historical price relationships with the major agricultural crops of corn, wheat, soybeans and sugar.3 In fact, the gold/soybean ratio is nearly at its all-time high.
At quarter end March 31, 2016, the gold/corn ratio, defined herein as the number of bushels of corn an investor could buy with the proceeds from selling one troy ounce of gold, was 351 bushels, versus a 39-year average value of 170 bushels.
Gold investors attempting to maximize portfolio performance through disciplined quarterly or annual rebalancing, may want to consider adjusting their gold holdings in tandem with their existing or anticipated agricultural sector portfolio investment mix.
For example, the historical data for the gold/corn ratio suggests that a mean reversion4 from March 31, 2016 levels of 351 bushels to the 39-year mean value of approximately 170 bushels of corn for each ounce of gold (bu/oz), could benefit an investor rebalancing gold for corn within their portfolio.
As illustrated in the chart on page 1, at 351 bu/oz the gold/corn ratio is approximately 107% above its nearly four-decade average of 170 bu/oz. Hypothetically, if an investor sold gold and purchased corn at the current 351 bu/oz level, and the ratio subsequently retraced to its historical mean value of approximately 170 bu/oz, the investor would then be able to sell the corn and buy back 107% more gold than was originally sold, to make the temporary reallocation from gold into corn.
The gold/corn ratio may have been within 6% of its all-time high at the end of Q1 2016, but both the gold/wheat and gold/soybean related ratios were also very near historic highs over the same time period. The gold/wheat ratio was within 3% of its all-time highest value, and the gold/soybean ratio was within 1%, or virtually at, its all-time high value. The gold/sugar ratio is 41% below its all-time high. Charts for the gold/wheat, gold/soybean, and gold/sugar ratios are shown below.
The current availability of both futures contracts and futures-based exchange traded products for gold, corn, wheat, soybeans, and sugar make rebalancing the gold and agricultural components within a portfolio easier than ever before. Investors and advisors need to make an assessment of the relative value of gold versus their other portfolio constituents, including agriculture, and appropriately adjust their allocations to suit their individual investment needs and objectives.
1 "Why Warren Buffett Hates Gold." NASDAQ 15 Aug. 2013: Web. October 9th, 2014.
2 Based on the 13-F filings for holders of GLD, the SPDR Gold Trust, as of 3/31/16 and found using Bloomberg Professional, April 12th, 2016.
3 Analysis & corresponding charts were prepared by Teucrium Trading, LLC, using Bloomberg Professional, April 12th, 2016. All supporting detail available upon request.
4 Mean Reversion: A theory suggesting that prices and returns eventually move back towards the mean or average. This mean or average can be the historical average of the price or return or another relevant average such as the growth in the economy or the average return of an industry.
Disclosure: I am/we are long I AM/WE ARE LONG CORN, WEAT, SOYB, CANE, TAGS.
Business relationship disclosure: Sal Gilbertie is the Founder, President, and CIO of Teucrium Trading, LLC, the Sponsor of the Teucrium CORN Fund ETP (NYSE Ticker "CORN") and other agricultural ETPs listed on the NYSE under the ticker symbols "WEAT" "SOYB" "CANE" and "TAGS."
Additional disclosure: I have held in the near past, and may purchase in the near future, shares of DGZ as a proxy for short gold against my long agricultural holdings of corn, wheat, soybeans and sugar.