Even though gold is generally a volatile asset, it is often considered a key diversifier, hedging against inflation or protecting during economic uncertainties. According to the authors (Pim van Vliet and Harald Lohre), in times of extreme macroeconomic events, including war, hyperinflation, or major economic recessions, gold investing is widely regarded as a safe haven. However, using gold as a hedge comes at the cost of lower returns. The authors explored the importance of gold in investment portfolios and its ability to reduce the risk of losses combined with bonds and stocks. Compared to many existing studies, they also consider a longer timeframe and the impact of inflation.

It’s always fun to push the boundaries of technology and see what it can do. The AI chatbots are the hot topic of current discussion in the quant blogosphere. So we have decided to test OpenAI’s ChatGPT abilities. Will we persuade it to become a data analyst for us? While we may not be there yet, it’s clear that AI language models like ChatGPT can soon revolutionize how we approach to finance and data analysis.

If you’re a regular reader of our blogs (and we hope you are!), you would not miss that we like to touch macro-economic subjects. One of that never-fading topics is the role of gold as a crisis hedge. The probably most known commodity is a popular choice for a portion of the total portfolio, from small investors to central banks, for various reasons (be it diversification or hedging). So let’s not further delay it, and today we ask: Is gold really a safe haven?

We have already published a few articles about how the different market cycles affect the performance of your portfolio and performance of market factors. So far, these states of the market were identified in-sample, with the benefit of hindsight. The full methodology of how we defined bull/ bear market, low/ high inflation, and rising/ falling interest rates is described in this article.

Today, we are going to define the same market states out-of-sample. We will describe our methodology and the thinking behind it all in this article. Both in sample and out of sample market cycle analysis may be useful for making investment decisions. It’s crucial to understand the differences and how to use this kind of analysis to your benefit.

Today, we analyze how all the factors we use in our Multi-Factor Regression Model performed during various Market Cycles (in sample), including the Bull/ Bear market, the High/ Low inflation, and the Rising/ Falling interest rates. Further, we also examine the performance of a Balanced Portfolio ETF – AOR, over past 100 years. This is done by creating the Factor AOR, which we constructed using our Multi-Factor Regression Model from AOR ETF. In addition to a chart comparison of equity curves, we also compare the performance of factor AOR to that of all the factors by means of risk/return tables, i.e. quantitatively. All the tables are sorted based on the Sharpe ratio from the best (at the top) to the worst (at the bottom).

What’s the performance of a balanced portfolio during rising rates? How does it behave when inflation is high? What about a combination of these market states? And how do trend-following strategies fare in such an environment? These and even more questions we will attempt to resolve in our today’s article. We will be looking at different market cycles and how a balanced portfolio and a typical trend-following strategy perform over these different market states.