Strategists Recommend Getting Out of Gold Now
Gold has been on a nice run over the last three months, up 13% and reaching a 6-year high not long ago. The fun might be over, but it’s actually too early to want to bail just yet.
Looking at gold charts, it might seem to be reasonable or at least excusable if people look to take profits in the area that it is currently trading in. We even have a couple of “strategists” out there recommending that we do this, and if we have held gold through double digit gains over the last 3 months, and we are itching to book those profits, this may not seem like that bad of an idea.
Taking profits for the sake of taking profits doesn’t make sense though if the goal of our investments is to make money, where we need to be guided instead by not how much we have made but how our decision to sell may add or take away from our overall money-making goal.
Aside from needing to recommend based upon expected outcomes of profit or loss, the next thing that we need to consider if we are going to make a recommendation like this is the goals of the trader or investor that is holding gold, and these do differ. If we make sweeping recommendations like this, we need to consider that there really isn’t a one size fits all strategy, as people look to accomplish different things with these investments.
In certain situations, such as gold being on a run up or a run down that leaves little doubt about its direction, general recommendations can be quite valid indeed. This is especially true during a bear market, where gold can drop in a pretty nasty way and we may even wonder why anyone is long gold at certain times, even if they are supposed to be using it for hedging.
It does not even make sense to hold a hedge with a negative expectation, such as we see when gold is really running cold, and unless the intention is to actually lose money on balance, this is simply a bad idea. Believe it or not, this isn’t a question that comes up anywhere near as often as it should as there are people who will just hold gold as a hedge regardless of its market outlook.
Aside from that, while investors do hold gold for speculative purposes, their preferred holding times can differ quite a bit. Many investors set these lengths of time too long, which ends up having them hold it longer than it would be sensible to do so under any timeframe, for instance during bear markets where it’s more likely that they are going to incur losses if they stubbornly refuse to part with it when they really should.
Within what we could consider to be valid timeframes, ones that choose various smoothing strategies but still are attuned to the bigger signals they follow, there is going to be some real variation here. Those who are tuned to shorter timeframes and more sensitive signals, using daily bars for instance, are going to see themselves exiting before traders using weekly or monthly bars and more forgiving signals.
A good example of this would be by looking at the gold market since last September, where it’s been in an overall upward trend. Those focused on trends of this length may still be in this trade, and if they didn’t exit during the pullback that occurred from February to May, it’s hard to imagine why they would want to be exiting now when we’ve got nothing even close to this sort of pullback.
However, those trading a shorter timeframe may have exited during this time and either gone short gold or waited in the wings until the move stabilized, and this is a distinct strategy that requires closer management. We aren’t seeing reasons to sell even based upon this more reasonable threshold either though.
Traders who use even more sensitive signals may see the current resistance that we’re seeing now as a reason to step aside, but it is still moving more upward than downward now and those who did bail earlier in the month on such a strategy are kicking themselves now if they are still out.
When we make broad recommendations to buy or sell something, we do need to consider the different needs and goals of people and we need to at least be reasonably certain that our general claims are going to be valid before we should be making unqualified recommendations.
Understanding How Gold Moves Involves Watching How it Moves
All of this is based upon price performance, but there are some people that don’t see this as all that important and instead focus more on other matters, such as interest rates or the dollar. This can have us ignoring to at least some degree what really matters, where the asset under consideration is moving.
Maneesh Deshpande of Barclays sees the current move as “purely speculative.” He observes that “speculative flows do not have a consistent track record of forecasting future gold returns,” which is a very interesting comment actually.
We need to ask why we would even want to forecast future gold returns, and the only reason for this is among those whose size is so massive that they are very illiquid and actually need to forecast such things that far in advance. This excludes just about everyone, because the rest of this can make our forecasts day to day if we wish to, even hour by hour or minute by minute if we are trading it very short term.
It does not even make sense to make forecasts beyond practical need and this can only lead us astray, as it so often does.
It is indeed true that looking at “speculative flows” isn’t going to allow us to predict where gold is heading that far out, and whatever forecasts we come up with are going to be very much contingent. An example would be seeing it rise, predict that it will continue to rise, and get out when this ceases, when the overall weight of speculation turns in the other direction or levels off enough that the expected short-term returns are too modest and therefore uncompetitive with other things we could be doing with our money.
The only real fundamental with gold is industrial demand, but that plays such a small role in the price of gold that it isn’t even worth looking at. Otherwise, gold is an instrument of speculation, pure and simple, and this is the reason why people buy it or short it, to speculate on it.
This is not to say that other things do not influence how much speculation it will receive, and things like the dollar and interest rates can matter from an inter-market perspective. However, whatever is going on with these other markets will be expressed in the price of gold and gold trends completely, without any need to guess or to predict.
If we really had a strong enough inter-market correlation that was predictive enough, then we might want to look at such things. An example would be interest rates affecting gold prices, or the strength of the dollar, but we just don’t have any data that is useful to make predictions with anywhere near well enough to be of practical value.
A good example of this would be with comparing stocks with gold. When people sell stocks during a bear market, they sometimes but not always drive up the price of gold. This therefore cannot be relied upon lest we end up with an exception, both moving down together, where we end up just assuming gold will rise or fall in a certain way and stick to our guns in the face of contrary evidence and performance.
Gold doesn’t correlate well at all with the stock market, the bond market, or interest rates, and trading it based upon this assumption will leave us misguided. It does correlate with the dollar much better, but even then, we never want to just assume something here and the dollar trending a certain way or expected to move a certain way will still need to be confirmed by the gold market, where how much this actually affects gold prices in this given situation will be expressed.
Some analysts even use these other factors to value gold, such as Shawn Quigg of JPMorgan, who has also come out recently to warn us of a top in gold. He also has an interesting comment to share with us, and “believes gold prices are already trading at a $50-60/oz premium to fair value based on current U.S. real yields and net investor positioning.”
Gold Price Changes Involve Changes in Supply and Demand for Gold, Period
The idea of gold having “fair value” apart from where it is trading at is actually difficult to even comprehend, as fair value with gold is exclusively determined by what people buying or selling it deem to be fair.
Basing gold value on bond yields takes inter-market analysis to a level well beyond what makes sense, because this requires that we assume a link between the two that is way beyond any evidence. Sure, inflows and outflows from the bond market can affect the price of other assets such as gold, but this is just one factor and whatever influence this has is expressed in the market daily.
We could take a certain ratio, perhaps the average ratio over time, and then claim that we’re over or under this ratio, but if we are over this ratio and gold is moving further up in price, this in itself invalidates this assumption.
Quigg is concerned about changes in guidance from the Fed, but the Fed telegraphs itself pretty well. There’s really no good reason to assume that they will alter their course that surprisingly with this upcoming meeting, and certainly nowhere near enough to make us want to short gold ETFs, as Quigg recommends based upon these concerns.
No matter what else is going on out there, gold has been holding up, and this includes the pricing in of the expectations from the Fed that other markets have done. We’d have to have some real insider knowledge to jump on a play, as there is at least insufficient reason out there presently to think that the Fed is going to do something crazy and surprising this time around.
We would have to be pretty eager indeed to sell to do so out of the sort of concerns expressed by these two. Sure, speculative moves don’t last forever, but this one continues on, and we at least should wait until it shows us it is over for now and not just guess or reference some concerns that are not even particularly noteworthy.
With this said, gold is an area of congestion here and although it is moving back toward the upper end of this range, we really may have found a top here for a while at least. This should not be something we just guess at though.
Should people be uncomfortable about holding their positions through an FOMC meeting, that’s another story, and there is more risk involved with these things, and although we already pretty much know what will happen, surprises do occur.
If we get a bomb dropped on us that would be that bearish for gold, it’s not that the gold market topples so fast that we will not be able to exit without big losses, and if people start heading toward the golden exits fast, we can join them and control this risk pretty well.
We can still choose to step aside though if we don’t even wish to take on this risk, but the decision that we may make to hang on and read the news here does not imply any commitment beyond that. Some people think that we need to decide about these things well in advance, but unless you are Warren Buffett or an institutional investor, this is just an illusion, and can be a harmful one at that.
There are always reasons to exit if we want to look for them, but we need to make sure that the reasons that have us doing this are substantial enough to justify the move, where we are more likely to be right than wrong, where the expected value of selling exceeds that of not selling.
We’re nowhere near this point right now, but situations do change, and we do need to keep a close eye on where gold ends up going over the next while. We do need to listen and let the market speak though rather than trying to outwit it and get outwitted ourselves instead.
Editor, MarketReview.com
Monica uses a balanced approach to investment analysis, ensuring that we looking at the right things and not confined to a single and limiting theory which can lead us astray.
Contact Monica: monica@marketreview.com
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