Financology Model Portfolios
Just a heads up on some upcoming tweaks to the Financology Model Portfolios. While the final figures are pending, these updates will slightly reduce the allocations to commodities and slightly increase the allocations to treasuries. These changes are prompted in part by developments at the Federal Reserve under new Fed Chairman Kevin Warsh, anticipating somewhat less of a need for inflation hedges. To be sure, the prospects for inflation are not going away, given the nearly $40T US government debt and the pressure Fed will be under to monetize, but at the margin I expect somewhat less inflation and plan to adjust model portfolio allocations accordingly.
These changes will also better reflect the low correlation of broad commodity indices, especially energy heavy indices like the SPGSCI, with other assets and the increased correlation of gold and stocks. They will include moving COMT from the Treasuries group to the Commodities group. Whereas previously COMT was grouped with GOVT to construct a TIPS-like treasury allocation, the Treasuries allocation will change to plain vanilla GOVT, and within the Commodities group IAU (gold) will be reduced somewhat to accommodate COMT.
This morning gold dipped below the $4000 mark we have been watching for, trading as low as $3971.84 about twenty minutes ago. Although as noted above we have reduced our allocation a bit, the decline in prices has done the work for us having made it unnecessary to sell since having done so at much more favorable prices in January-March. As indicated in the linked comment, we see prices below $4000 as a bargain, as apparently others have as indicated by the rapid snap back above that psychologically significant round number.
This of course doesn’t mean it can’t go lower in the near term … it’s a long term perspective. For a more granular analysis, let’s see what Przemyslaw Radomski has so say:
Gold’s Decline: It Was Never The War
I could nitpick Radomski’s analysis for investing greater significance in the forex-based USDX per se than is warranted, because it merely measures the USD against other currencies. It only takes those currencies to decline to make the USD look strong, and over time all currencies do in fact decline. But aside from that, I agree with his overall view, which I characterize as deflationary. For now, the USD is prone to rise against virtually all other assets, making it genuinely strong.
My current positioning is underweight stocks, underweight commodities, and overweight cash USD and treasuries.
Latest gold $3983.70. As indicated before the decline is justified in light of the less inflationary Fed outlook. Substantially more would not be justified, however, because of the federal debt and the pressure to monetize. In addition, the dedollarization of international reserves is expected to continue as the weaponization of the dollar won’t soon be forgotten.
So gold ~$4000 is about right for the time being. Substantially lower would be cheap, higher, dear.
Finsher, your annual and quarterly synthetic systems models are forecasting much higher gold prices in 2026, outperforming other asset classes. While you’ve been right to be underweight commodities so far this year, why wouldn’t you be overweight gold in light of your synthetic system forecast?
And does gold dropping below $4k affect your positioning?
Aye, Synthetic Systems is meant to be independent of my opinions, and sometimes we disagree. I noted the gold projection might appear a bit exaggerated at the 2026 release and have expressed growing reservations about it since, especially later in January as gold, silver and platinum all went vertical. See the comments section under that post, for example my reply to your comment. More recently we had the first Fed meeting under new Chairman Warsh, which is potentially a watershed event; we’ll just have to see if the tough talk is followed with tough action. Another quarterly update is due soon, and while anything is possible, my bet would be it gives us a more subdued outlook. It’s designed to learn from its mistakes.
I haven’t taken any action on gold since it fell below $4000 only earlier today (actually haven’t made any gold trades since March), and am not planning any. I sold a portion of my IAU position in January-March, and the more recent price declines have further reduced my percentage allocation organically. I’m comfortable holding the remaining shares as a long term position. I’m not really a trader; I sold what I did mostly because prices had gone up too far too fast and the position became too large a percentage of assets. Not that I expect it to, but if it were to fall much more from here I would likely buy because it became too small. Keeping portfolio allocations from getting too out of whack is another useful tool in my toolbox.
I don’t have a clear near term outlook on gold, except that as I mentioned earlier, on Elliott Wave grounds this is likely the final leg down of this decline. For long term investors who are under allocated, it’s a bargain.
Gold is staging a bit of a recovery today on rebounding from deeply oversold conditions. This does not yet confirm the end of the downtrend out of late January, but once that occurs it should be followed by a tradable rally.
Medium term we’re watching for ratification of the hawkish Fed bias that emerged from the last FOMC meeting on FOMC 2026 0617. As noted at the press conference Warsh made the most credible case for bringing inflation to heel in at least three Fed chairmanships. However firm though, tough talk means nothing without equally firm action. If over the course of the next few meetings we continue to see elevated consumer inflation figures without concrete tightening steps, gold’s ascent should resume in force.
Long term the dire fiscal picture dominates, as unless credible action on runaway debt materializes the only alternative would be Fed monetization, unequivocally bullish for gold.
The picture for stocks is at the moment dominated by rotation. We’ve seen this show before. That particular episode lasted a few months, then was followed by another rotation back to the la-la-land of infinite dreams. Now it’s rotating back again. I have no tools for prognosticating how long it will last, but am fairly confident on both SS grounds and fundamentals that the third quarter we’re about to enter has some broadly bearish undertones for stocks as an asset class.
The commodities season we foresaw last December came with an expiration date around mid year, which appears to have arrived a bit earlier than expected, likely due to the installation of Warsh at the Fed and his hawkish talk. Conversely, the treasuries outlook has improved. These trends, as with gold, remain to be validated with hawkish action.
The Model Portofolios have been updated as of today. As mentioned before, the explicit gold (IAU) allocation has been reduced somewhat. It was 16%, now it’s at 12%. The total metals allocation is a still considerable 15%, even more since the enlarged COMT allocation includes its own roughly 20% exposure to metals.
Regardless, these numbers aren’t rigid rules, but rather flexible guidelines for an allocation without a short to medium term market view. The overall asset class mix remains 20% commodities, 20% treasuries, 30% dividends, quality and value stocks, and 30% global stocks. When inflationary policy is being pursued, consider more commodities and stocks; when policymakers are fighting inflation, more treasuries and cash.