As mentioned in prior posts, I began blogging on this developing Gold and Silver ETF Allocation System via the "CAPS System" on Motley Fool's site, fool.com. Due to the scoring-system used at CAPS though, I am making this blog the primary location online where I will document my progress refining this System and its performance in the market. This entry below was originally posted April 15, 2007 @ CAPS. I've copied it here to provide a complete history to the reader who wishes to research my Allocation System development over time and confirm the transparcency of my process. One can obviously view the original entry from that point in time via my CAPS blog there but I encourage one to primarily follow my Allocation System via this blog, Greham's Day in the Sun.
Since August 28, 2006 through last Tuesday, April 10 (2007) the Silver ETF (SLV) returned 13.97% The Gold ETF (GLD) returned 11.32% if held during the same time period. The S&P500 Index returned 11.39% during the same period of time, exluding dividends. The similarities of returns alone, between the Precious Metals and the S&P over that period is an interesting fact.
The back-testing of this Allocation System over that ~7 month period indicates one would have generated a total return of 28.22% following the signals of when to concentrate upon SLV or GLD or a combination of the two. The hypothetical investor would have still been 100% invested in either one--or a combination of both--of the Precious Metals ETF's during the entire time. This proposed system is not one of trading from the investment vehicles into cash and back again. One of the basic assumptions underlying this system is that the investor is wishing to maintain 100% exposure to Precious Metals with this portion of their overall investment portfolio. It could be, for instance, that the investor has a small 5% to 10% of their overall investments allocated to the metals as a hedge against inflation or other concerns about economic conditions going-forward. The goal of this system is to allow the investor to maintain that allocation to the metals while maximizing return within that sector and attempting to minimize downsize risks.
As mentioned in earlier posts, the Silver market has a solid, long-term history of being more volatile than Gold. Silver generally experiences greater gains during uptrends and larger losses during downtrends, relative to Gold that is. During this 7 month period in fact, the Silver ETF had one 10-day period with a 17% decline. The Gold ETF lost a lesser 9.5% during that steep correction in the metals markets. But this Allocation System being tested here would have theoretically limited the investor to a loss of even less than the 9.5% experienced in the GLD ETF alone.
During this ~7 month backtested period, the Allocation System would have signaled 8 changes in allocations. That is, 8 trades would have been made in the market between SLV and GLD to one extent or another. Sometimes the investor would have been 100% in SLV or 100% in GLD and during other periods, a combination of the two. During the 153 trading days of this period tested, 43% of the time the investor was allocated entirely to SLV; 29% entirely to GLD and the remaining 28% of the period, to GLD and SLV each in equal proportions.
Designing such a system in hindsight is, of course, monumentally easier than making the correct investment decisions ahead of time. That is the point of documenting this exercise via CAPS here @ Fool. Time will indicate whether these results can be more or less replicated going-forward. I'm looking forward to the chance to test here and make any refinements.
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