Rebalancing the Golden Triangle Index

Here is a chart of the Golden Triangle Index (GTI), broken down into its three components (gold, S&P 500 stocks and 3-year T-notes), from October 2007 to October 2012. Below it is a chart showing GTI's monthly drawdowns.

160

Golden Triangle Index

140 120 100 80 with component breakdown end-Oct 2007 = 100

GTI current value = 137.31

Gold

S&P
60 40 20 0 Oct-07

Golden Triangle Index 3tn Return Volatility Sharpe

Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11

5 yr 6.54% 7.36% 0.79

Oct-11

1yr 4.65% 6.30% 0.73

Apr-12 Oct-12

0% -2% -4% -6% -8% -10% -12% -14% Oct-07 Apr-08

Sep. 2011 -4.48%

Golden Triangle Index

Oct. 2008 -11.79%
Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 end of month drawdowns

Apr-11

Oct-11

Apr-12

Oct-12

In the top chart on the front page, a step down in 3-year T-notes (violet color) in November 2008 does not indicate a sudden drop in their value. Rather, it reflects a rebalancing of the portfolio undertaken to bring 3-year T-notes back to their target weight of 50 percent, after they had climbed to 58.29% of the portfolio value in October 2008. Three upward steps in 3-year T-notes in 2009, 2010 and 2011 also are an artifact of rebalancing, rather than large price rises. As shown in the chart below, without rebalancing, gold would have grown to comprise about a third of the GTI portfolio by 2011, owing to its large price rise. Meanwhile, at their low point in February 2009, stocks' initial 30 percent weight in GTI would have been cut nearly in half without rebalancing.

240 220 200 180 160 GTI current value: 137.31 140 120 3tn 100 80 60 40 Oct-07 GTI (shaded area)

Golden Triangle Index

total returns of GTI and its components end-Oct 2007 = 100 Gold

S&P

Apr-08

Oct-08

Apr-09

Oct-09

Apr-10

Oct-10

Apr-11

Oct-11

Apr-12

Oct-12

To keep GTI's component weights close to their targets of 20, 30 and 50 percent (for gold, stocks and 3-year T-notes, respectively), a five-percent tolerance band is applied to the target weight of each component, to serve as a threshold that prompts rebalancing. For example, 3-year T-notes jumped to 58.29% of the portfolio in October 2008. This happened not because their value was falling (in fact, it was rising, as the chart shows). Rather, the value of S&P 500 stocks and gold was falling, reducing their proportional weights in the portfolio. As shown in the charts that follow, six rebalancings were triggered during the past five years when one or more of GTI's components drifted beyond its plus/minus 5 percent tolerance band.

30%
Jan '08: 25.42%

Feb '09: 26.07%

25%

GTI rebalancings due to gold weight:

target zone

20%

15%

Gold weight
10% Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12

40%
Jun '09: 35.24%

35%

GTI rebalancings due to S&P weight:

target zone

30%

25%

Jan '08: Oct '08: 24.81% 24.12%

Feb '09: 22.99%

S&P weight
Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12

20% Oct-07

Apr-08

Oct-08

Apr-09

60%

Oct '08:
58.29%

GTI rebalancings due to 3tn weight:

target zone

55%

50%

45%

40% Oct-07

Mar '10: 44.87%

Apr '11: 44.83%

3tn weight
Oct-11 Apr-12 Oct-12

Apr-08

Oct-08

Apr-09

Oct-09

Apr-10

Oct-10

Apr-11

On average, Golden Triangle Index needs rebalancing about once a year. Four rebalancings between January 2008 and June 2009 were the result of extremely volatile markets during the financial crisis. As markets calmed, only two rebalancings were needed during the next three years. Since rebalancings are small between 5.13% and 8.29% of the portfolio value in these six instances annual turnover is kept low even when rebalancings are more frequent. Low turnover means low maintenance costs. By selling components when they exceed their upper tolerance threshold, and buying them when they undershoot their lower threshold, rebalancing imposes a mechanical 'buy low, sell high' discipline which adds materially to GTI's returns. Since brokerage statements usually show the percentage weight of each holding in the account, the need for rebalancing is apparent at a glance when the target weights are kept in mind.