The spot price of gold has risen nearly 8% during the third quarter of 2012, while the more volatile and less liquid precious metal silver has risen over 21%. That price appreciation presents favorable technical structures for both metals, with spot prices above their respective 200-day moving averages for the first time since March (Figures 1.1 and 1.2).
Additionally, the expectation of a renewed round of global easing here in the U.S. has resurrected the argument that in a world of “competitive currency devaluation,” gold is the currency of last resort. Collectively, this all sounds rather bullish doesn’t it? In fact, I am certain the “search for yield” investor crowd is burning the phone lines to their advisor to “buy, buy, buy.” However, I suggest that enthusiasm be tempered.
This is not a call on the direction of precious metals; you don’t need me to tell you which way they are headed. Over the past decade (Figure 1.3) they are truly one of the few remaining “buy and hold” assets. The path of least resistance is higher; the technical and fundamentals both confirm that. However, having spent the better part of 18 years very close to the futures pits that trade gold and silver, I want to ensure that as the metals go higher, investors have the proper allocation so that they may enjoy the ride higher.
You may have read in the past few days that hedge funds have increased their holdings of gold and silver to their highest levels since February. Well, of course they did – that is their job, to find new opportunities, or changes in momentum, and maximize their allocations. But, I repeat, that’s their “job.” For investors, unless you plan on dedicating much of your day anchored to the trading screen, your job is different.
For the investor who gets caught in the euphoria, chances remain high that their return will be diminished by the dramatic increase in volatility that occurs once the “sleeping giant” that are precious metals awakens. Look back at the third quarter of last year (Figure 1.4) and how the price of gold appreciated in a rather muted fashion until late July 2011. Once August 2011 presented itself, the price surged, ownership did as well, and investors who should have allocated gold as an investment became traders. Not surprisingly, a nearly $300 drop in September certainly diminished a few investor returns.
Gold is not a trading vehicle. In fact, it is one of the more difficult assets to trade. Gold is, however, a much desired investment asset that absolutely should be allocated in a portfolio. But I suggest the allocation should only be between 3% and 8%.
The Yankee legends never let us Yankee fans down. Please always remember those legends when allocating to precious metals. Maybe today is the time to favor #7 Mickey Mantle or #8 Yogi over #3 Babe Ruth but let’s pause at #9 Roger Maris whose career statistics look as volatile as gold historically can be.
Figure 1.1 Spot Price of Gold with Recent Break Back Above 200-Day Moving Average
Figure 1.2 Spot Price of Silver with Recent Break Back Above 200-Day Moving Average
Figure 1.3 Spot Price of Gold, September 2002 To September 2012
Figure 1.4 Spot Price of Gold, Third Quarter 2011