This is going to be the most subjective and least quantitative post out of the 500 odd posts I have written. I am not a gold bug, and while I have written that gold shares are attractive relative to gold in the past, I don’t see a lot of strategic value of gold to a portfolio (tactical, yes).
Gold is currently above both its 50 and 200 day SMAs. Before someone asks, yes, using a long term simple moving average increases absolute and risk adjusted returns while reducing drawdown vs. a buy and hold of gold.
That having been said, and this is probably an Occam’s 5th Grade level observation, but is there anyone out there that believes that if/when gold breaks through the 1000 level that it doesn’t zoom straight to 1300 or 1500? Once that huge psychological barrier of 1000 is broken (it has already been tested once) I think the sky is the limit.
A simple strategy would be to buy gold (futures, GLD, or gold shares are probably even better GDX) call options far out of the money. Since I have no idea when gold might break 1000 (if it ever does) it could also make sense to buy a call spread and keep rolling them over until gold gets to 1000.
Just a thought.
Update:
Lots in the academic literature on round numbers. One example:
"Currency Orders and Exchange Rate Dynamics: An Explanation for the Predictive Success of Technical Analysis.” – Osler, The Journal of Finance 58(2003):
"This paper shows that requested execution rates for stop-loss and take-profit orders cluster at round numbers, consistent with existing evidence on limit orders in stock markets. Its also shows that the pattern of clustering differs across order types and could produce the price behaviors predicted by technical analysis. Executed take-profit orders cluster more strongly at round numbers than do stop loss orders. Since take-profit orders should tend to reverse price trends, exchange rates should tend to reverse course at round numbers when they hit take-profit dominated order flow. Executed stop-loss buy orders cluster most strongly just above round numbers, and executed stop-loss sell orders cluster most strongly just below round numbers. Since stop-loss orders should tend to propagate trends, exchange rate trends should be relatively rapid after the rate crosses a round number and hits stop-loss dominated order flow."
PS Anyone remember when I wrote in December that gold was in backwardation? That didn’t last long.
PPS If there is anyone who doesn’t think that risk management is important, then you clearly don’t know anyone who (still) owns Russian stocks.
Meb,
A quantitative examination of gold demonstrates its long-term strategic value as a portfolio diversifier. For example, 60% invested in the S&P 500 and 40% in LB Government Bond returned 10.18% from 1973 – 2007 with a standard deviation of 11.30% and a maximum drawdown (using only annual returns) of 19.80%. A portfolio of 50% S&P, 40% bond and 10% gold (the metal) gained 10.21% with a standard deviation of 9.08% and a max drawdown of only 6.72%. The portfolio with gold produced a similar total return compared to the stock and bond portfolio, but had 19.6% less volatility and a huge 66% reduction in drawdown, this despite the fact the bond index out performed gold during this period. Gold is one of the few asset classes to have a negative correlation to both stocks and bonds, making it an ideal candidate to increase portfolio diversification. I do agree with you that adjusting gold exposure on a tactical basis has the potential for better results than a pure strategic approach. Thanks.
You are correct!
Especially in the reduction of vol, but you gotta look at the drawdowns at least monthly. (And daily would be even worse for everything.)
If you include 2008, the 60/40 MaxDD is closer to 25% and adding in the 10% Gold takes that down below 20%.
Amazingly gold, from 73-07 had a standard deviation of 30%, yet adding it to a stock/bond mix reduces overall portfolio volatility. Non-correlation is the strategic investors best friend! Can't wait for your book.
I'm simply a stock chartist and have been writing about gold for some time (and I'm not a gold bug by any stretch of the imagination). You might be interested in my latest analysis of the relative performance of S&P, GLD and GDX (at http://stockchartist.blogspot.com/2009/01/crame...)
I'm simply a stock chartist and have been writing about gold for some time (and I'm not a gold bug by any stretch of the imagination). You might be interested in my latest analysis of the relative performance of S&P, GLD and GDX (at http://stockchartist.blogspot.com/2009/01/crame...)
Thanks Guru.
Thanks Guru.
Gold is at all time highs against most currencies in the world. americans who earn in dollars and spend in dollars tend to forget that all prices represent a spread or ratio between two items. When we say in the U.S. that gold is 900 we really are saying that 1 ounce of gold equals 900 dollars. Lately the dollar has been fairly strong and thus rather staabel against gold. So has the japanese yen and the Chinese yuan. But look at the price of gold for users of Euros or British Pounds or Australian dollars. Gold is rising substantially against those currencies. The plurality of gold strength compared to various fiat paper lends crdibility to the trend's viability. There are no major central banks looking to strengthen their currency in this economy. That is when gold is worthwhile.
“is there anyone out there that believes that if/when gold breaks through the 1000 level that it doesn’t zoom straight to 1300 or 1500?” —– Wow! Doesn't that make the contrarian in you expect gold to drop precipitously after hitting 1000? (grin)
I like the gold play also for low correlation to equities and with our congress spending like there's no tomorrow, inflation fears will ultimately be stoked, even if it takes a few years to recover. I think the upside gain is a greater probability than precipitous decline. Not long now, but will probably take a 10% portfolio position soon. Might just go long instead of call spreads since you may repeatedly shell out premium spreads each period with nothing to show for it if gold doesn't run.
Unfortunately, I still hold shares of VIP and CEDC, each of which have strong ties to Russia/Eastern Europe.
that is certainly very interesting…. we're talking about long only correct?
that is certainly very interesting…. we're talking about long only correct?