Gold, BTC and Bonds as Hedge - Duration, Hedge Ratio

DISCLAIMER: Educational content, not investment, tax or legal advice. Consult licensed advisor.

Intro: March 2020 - Truth Test

March 12 2020, S&P -10% one day. What did your “hedges” do?

• Gold: -4% (margin calls, sold everything)
• BTC: -39% (from $8000 to $4800)
• Long-term bonds TLT: +5%
• Cash: 0%

Then for a month:

• Gold: +15% (bounced first)
• BTC: +40% (bounced second but from deeper bottom)
• TLT: +12%
• S&P: -20% more down then bounce

Conclusion: No hedge works perfectly on panic day. Difference is what does 30-90 days after panic.

In this lesson we calculate mathematically how much of what you need.

Table of Contents

1. What hedge is and why not look for perfect
2. Bond duration - why long bonds rise when stocks fall
3. Gold - physical vs ETF, pros cons
4. BTC - is it digital gold or leverage on NASDAQ?
5. Hedge Ratio formula
6. Comparison table: gold vs BTC vs bonds
7. Why important for trader
8. How to apply - how much % portfolio in hedge?
9. Case Study: 100k PLN portfolio VWCE + hedge 2022
10. Beginner mistakes
11. Exercises and Checklist

1. What Is Hedge?

Hedge is asset that has negative or low correlation with your main portfolio and rises (or falls less) when portfolio falls.

Ideal hedge: Corr = -1, similar vol. Doesn’t exist.

Real hedge: Corr close 0 or slightly negative (-0.3 to 0.1), vol not too high, history of rise in crises.

Goal of hedge not profit. Goal REDUCTION OF DRAWDOWN. You pay premium (lower long-term CAGR) for calmer sleep.

2. Bond Duration - Secret Weapon

Duration measures sensitivity of bond price to yield change.

Modified_Duration ≈ -(Δ Price/Price / Δ Yield

Example: Bond with duration 16y (DTLE - US Treasury 20+). If yield falls 1% (4.5% to 3.5%), price rises:

Δ Price = -Duration * Δ Yield * Price = -16 * (-0.01) * Price = +16%

That’s why in 2008 when Fed cut rates 5% to 0%, TLT went +30% while S&P -45%. Hedge worked.

Types of duration:

2022 problem: Rates rose 0% to 5% to fight inflation. Stocks and long bonds fell together. Duration worked against you. So need more than just bonds.

3. Gold - 5000 Years Hedge History

What: Precious metal, no cashflow, price based on supply/demand and fear.

Correlation with stocks long-term: ~0.05 (almost 0). In deflationary crisis (2008) gold first -25% (margin calls) then +150% over 3y. In inflationary (1970s) gold +2000%.

Physical vs ETF:

For portfolio: 90% should have 4GLD in IKE, not physical in sock, unless prepper.

For US investor: GLDM 0.10% TER or AAAU.

4. BTC - Is It Hedge?

Bitcoiners thesis: Digital gold, limited supply 21M, independent from system.

Data 2015-2024:

• Correlation BTC vs S&P 500: 0.35 (rising in bull, falling in bear but still positive)
• Correlation BTC vs NASDAQ 100: 0.52
• Correlation BTC vs gold: 0.18
• Volatility BTC: ~70% yearly vs 16% S&P vs 15% gold

Thus: BTC behaves like leveraged NASDAQ, not gold. In 2022 NASDAQ -32%, BTC -65%. 2x leverage.

Can be hedge? Only if very small position (1-5%) as lottery ticket on devaluation of financial system. Not as main hedge.

Vol formula: If portfolio 100k, add 5% BTC vol 70%. Vol contribution:

Vol_{contribution} = Weight * Vol = 0.05 * 70\% = 3.5\%

That’s more than 20% bonds contribution (0.20*5%=1%). Small weight, big impact.

5. Hedge Ratio Formula - How Much Need?

Key formula of course:

Hedge_Ratio = - Corr(Portfolio, Hedge) * (Vol_(portfolio/Vol_(hedge

This tells how many units of hedge needed to minimize portfolio volatility.

Numeric example:

• Your portfolio: 100% VWCE, Vol = 16%
• Hedge: Gold, Vol = 15%, Corr = 0.05

Hedge_Ratio = -0.05 * (16/15) = -0.0533

Negative because positive Corr? Formula with minus assumes you want negative correlation hedge. If Corr positive, hedge ratio negative means short hedge (no sense). So formula used when Corr negative.

Take Long Bonds: Corr = -0.15, Vol = 12%

Hedge_Ratio = -(-0.15) * (16/12) = 0.15 * 1.333 = 0.20 = 20\%

That is to hedge 100% stocks you need 20% long bonds. Exactly what Golden Butterfly has (20% long bonds).

For gold: Corr 0.05 -> doesn’t hedge mathematically. Used as diversifier, not hedge. Allocate 10-20% to lower max DD, not vol.

For BTC: Corr 0.35, Vol 70%

Hedge_Ratio = -0.35 * (16/70) = -0.08

Negative! BTC doesn’t hedge stocks, raises risk. To use treat as growth stock, not hedge.

6. Comparison Table Hedges

7. Why Important for Trader?

Because as trader you already have huge exposure to RISK-ON. Your longs on stocks, indices, crypto bet on liquidity growth.

In risk-on crash, you lose 2x: on trading and on stock portfolio if 100% stocks. Need something RISK-OFF that gives capital to buy dip when all cry.

Gold and long bonds are your ammunition. When S&P falls -30%, you sell 5% gold that grew +10% and buy cheap S&P within rebalancing. That’s premium calculated in lesson 03.

8. How to Apply - Golden Rules of Hedge Allocation

For trader 34 aggressive:

• If trading stocks/tech (NASDAQ): Need strong deflationary hedge: 20% long bonds + 15% gold + 0-3% BTC (lotto)
• If trading forex/gold: Already have gold exposure, add more bonds: 25% long bonds + 5% gold
• If trading crypto: Already have BTC, DO NOT add more BTC to retirement! Add 20% gold + 20% long bonds to balance.

Starter formula for Pole & US:

Trader_Retirement = 55\% VWCE/VT + 20\% AGGH/DTLE/BND + 15\% 4GLD/GLDM + 5\% Cash + 5\% BTC

Hedge calculation: 20+15=35% low/negative correlation vs stocks.

Rebalancing hedge: When gold jumps +40% (like 2024), will be 21% vs target 15%. Sell excess and buy stocks. Vice versa when gold -20%.

9. Case Study: 100k PLN / $25k 2022 - Year of Truth

2022: S&P -19%, NASDAQ -33%, Global Agg Bonds -16%, Gold 0% USD but +2% PLN (PLN weakened), BTC -65%.

Portfolio A: 100% VWCE (100k PLN / $25k) End 2022: ~81k PLN / $20.25k (-19%). Max DD -25%. No cash to buy dip.

Portfolio B: 60% VWCE / 20% AGGH / 20% 4GLD (60k/20k/20k) VWCE 60k -> 48.6k, AGGH 20k -> 16.8k, 4GLD 20k -> 20.4k Total: 85.8k PLN (~$21.45k) (-14.2%). Less than 100%. And had gold preserving value.

Portfolio C: 50% VWCE / 10% AGGH / 20% 4GLD / 15% DTLE / 5% BTC (2022) VWCE 50k->40.5k, AGGH 10k->8.4k, 4GLD 20k->20.4k, DTLE 15k->9k (-40% rates!), BTC 5k->1.75k Total: 80k (-20%). Worse because DTLE and BTC! Lesson: 2022 no hedge worked ideal except cash and partially gold. Therefore cash 10-15% necessary.

Conclusion: Best multi-crisis hedge is mix: little duration (not 100% long), some gold, some cash. BTC didn’t help.

10. Beginner Mistakes

1. “Buy BTC as safe haven”: BTC -80% DD, 70% vol. Not safe haven. Speedboat.
2. 100% gold because “system will collapse”: Gold 1980-2000 -70% real 20 years. 20 years waiting for top.
3. No understanding duration: Buying short bonds expecting +20% in crash. Won’t. Duration 0.3 = +0.3%. Need 15+.
4. Hedge without rebalancing: Have gold but never sell to buy cheap stocks. Hedge without rebalancing is only cost, not premium.

11. Practical Exercises

Exercise 1: Calculate hedge ratio for your portfolio (e.g. 100% VWCE) vs DTLE using Vol VWCE 16%, Vol DTLE 12%, Corr -0.15. Exercise 2: See 2022 chart: TLT vs GLD vs BTC. Which fell least? Calculate DD each. Exercise 3: Simulate portfolio 70% VWCE / 15% 4GLD / 15% DTLE on PortfolioVisualizer 2010-2024. Compare max DD vs 100% VWCE.

12. Checklist

• Know duration of my bonds (IB01 vs AGGH vs DTLE)
• Understand why BTC correlated with NASDAQ and not pure hedge
• Calculated hedge ratio for long bonds: ~20% to hedge stocks
• Have min 10-20% portfolio in low correlation assets (gold + long bonds + cash)
• Know cash 10% is also hedge - gives option to buy dip
• Have rebalancing plan for hedge: sell what’s >20% from target
• Don’t have >5% BTC in retirement if actively trading crypto

Summary and Next Steps

No ideal hedge. There is basket of hedges for different inflation regimes:

• Deflation: Long bonds (DTLE/TLT)
• Inflation: Gold (4GLD/GLDM)
• System devaluation: BTC 1-5% + gold
• Panic: Cash (IB01/SHY)

Formula Hedge_Ratio = -Corr * (Vol_p / Vol_h) tells how much you need, but common sense says 10-25% bonds + 10-20% gold is base for trader.

Next lesson we go to most important tax optimization in Poland: IKE, IKZE and how to build retirement glidepath that doesn’t require you count on state pension.