Financial Professionals


Gold Selloff


Whether you have attended an investment conference at which I presented, or read my blogs and quarterly commentaries, you certainly understand my viewpoint on the allocation of gold in a portfolio. Since early October, the spot price of gold (Fig 1.1) has fallen from slightly below $1800 to below $1400 now. That sharp decline should not motivate investors to increase allocations within my suggested 3% to 8% allocation range.  I expect that keeping allocations to precious metals at the lower end of that range will continue to be the optimal strategy.
Gold peaked at $1920.70 on September 6, 2011. That peak occurred with weeks of contentious deficit debacle in DC. I would argue that the August 2011 DC follies are a classic example of when full ownership of gold should have been optimal. However, it was not, and it proved to signal a major shift in momentum.
That disconnect should have quickly alerted gold bulls to view holdings rather suspiciously. In recent months, spot gold has declined, despite the resurrection of euro debt crisis concerns via Cyprus. The continued strength of the U.S. dollar and expectations for a strong second half of 2013 U.S. growth would stabilize real interest rates in positive territory and provide a headwind for a reversal in gold’s momentum back to a prevailing bull trend.
Keep in mind that despite the sharp selloff since October 2012, speculative length measured by ownership of gold futures and ownership of gold ETFs remains stubbornly high, relative to the rate of the decline. Gold ownership (Fig 1.2) fell sharply from the fall of 2011 into the middle of 2012. However, in the fall of 2012, ahead of the Fiscal Cliff debate, it was rebuilt once again. Current long positions are still above the mid 2012 levels. Before consideration can be given to increasing allocations to gold further, reductions in ownership of gold futures and gold ETFs must be confirmed.
Lastly, investors should view commodities with great concern if the usage and demand of a commodity is heavily reliant on a global presence. Rather, commodities with a U.S.-centric focus, such as natural gas, are currently viewed as an investment opportunity.      
Fig 1.1 Spot Gold April 2011 to April 2013

Source:  Bloomberg
Fig 1.2 CFTC Commitment of Traders Long Futures Positioning April 2011 to April 2013

Source:  Bloomberg

Past performance is not a guarantee of future results.

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.