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TBAR Offers Alternative Gold Exposure

Spencer Bogart

Gold is a peculiar asset:Despite its volatility, it’s commonly perceived as a “safe haven”—the two don’t usually go together. Investors with a short- or medium-term horizon are in a pickle regarding whether to own gold.

On one hand, gold has a strong track record of retaining value over long periods. On the other, it’s a volatile asset whose value retention over short horizons is shaky at best.

Most literature on the topic tends to be at one extreme or the other:Critics argue gold has no intrinsic value whatsoever, while gold bugs point to gold as the only “real” money. The literature tends to neglect the middle ground—where most investors fall.

Most people recognize they can’t actually do anything with their gold—they can’t eat it, farm it or build much of anything from it—but they also recognize its effectiveness as a store of value in crisis periods (banking panics, currency crises).

I’m not writing to debate the merits of gold but to summarize the discourse and suggest a product that might help investors get the best of both worlds.

Trade-off No Longer

The RBS Gold Trendpilot ETN (TBAR) could help investors have their cake and eat it too. Depending on gold’s current price relative to a rolling moving average, TBAR is either fully exposed to gold or fully exposed to three-month Treasury bills (cash-equivalent).

The fine print:When the price of gold is above its 200-day moving average, the note tracks the returns of gold and only switches to cash exposure two days after the price of gold has been below its 200-day moving average for five consecutive days.

For example, TBAR most recently swapped gold exposure for T-bills in February and hasn’t gone back to gold yet. Since then, gold is down roughly 15 percent, while TBAR is relatively flat.






Consider what this means to an investor near/in retirement:The value of her gold allocation has been largely preserved, and when the downtrend reverses, she’ll regain gold exposure to hedge against tail-risk events.

Here’s the crux:An investor in retirement doesn’t have the staying power (time, in this case) to stick with gold through its down-months (or years) but—perhaps more than anyone—needs the protection that gold has historically offered from extreme scenarios such as banking panics and currency crises.

TBAR has been effective since its launch in the beginning of 2011, and its backtested results are equally as effective.


I would be remiss if I didn’t discuss TBAR’s limitations, however.

TBAR is ineffective for long-term gold exposure. Investors with a long-term allocation to any asset class do so expecting it to appreciate. If that’s the case, why bother with TBAR’s process of exiting and then re-entering gold exposure?

For example, in the chart below, why bother exiting at Point A only to re-enter at Point B considering that the outcome is the same, but more expensive, than if the process never occurred?

Gold 200-Day SMA

In fact, it’s exactly this process that damages TBAR’s viability as a long-term instrument for gold exposure. When I backtested TBAR’s strategy through 2005, I found that nearly every time the fund exited gold exposure, it re-entered at a higher price (selling lower and buying higher).

TBAR’s other big limitation is that it’s an ETN. Attaining gold exposure via an ETN flies directly in the face of many who believe in the yellow metal. TBAR investors don’t actually own any gold and, worse, only get paid the returns on their investment if RBS is in a financial condition to make those payments—otherwise, “sayonara.”

Ultimately, TBAR isn’t a panacea of gold investing, nor would I promote it as a mainstream gold ETP. For the right person, however, TBAR offers a valuable product that does exactly what it says on the tin.

At the time this article was written, the author held no positions in the securities mentioned. Contact Spencer Bogart at sbogart@indexuniverse.com or follow him on Twitter @Milton_VonMises.

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