Email of the day
Comment of the Day

August 23 2010

Commentary by David Fuller

Email of the day

On gold
"I have two queries for you, as follows:

"Over the years, I have noticed that you have constantly traded in and out of gold; in fact if my observation is correct, gold used to be your preferred trading vehicle. Recently, not only have you sold your long term investment in gold, but have not put in a trade although gold has moved up impressively by more than 5% in last 12 trading days! Would it be possible for you to explain the rationale behind this, so that we may also benefit from your thought process?

"As you have often mentioned, 'mean reversion to 200 dma' is one of the useful principles to be kept in mind, when looking at charts for individual stocks, bonds, commodities etc. I was just wondering whether this principle would also be applicable in case of say, a well-balance fund comprising of a large number of equities/bonds from all over the world as also various commodities?!

David Fuller's view Starting with your latter query, if the fund price in question is clearly trending rather than broadly ranging, then it is quite likely that the 200-day moving average would be a reasonably appropriate trend smoothing indicator. Consequently, clear overextensions relative to the MA would suggest an increased risk of mean reversion. However, check out the MA's previous usefulness in terms of back history, using at least a 10-year price history in the Chart Library for the fund concerned.

Regarding gold, yes, it has been my favourite futures trading vehicle over the last decade, second only to silver. I also held gold shares throughout most of that period, until recently as you observed.

I thought I had been quite clear in my reasons but let me review them:

First, I was on holiday last week but I think you will find that both Eoin and I pointed out gold's (monthly, weekly & daily) improved performance following its look at lateral trading commencing near $1150 in early August.

I did not want to short gold because of its overall upward trend but I was deterred from further long trades in futures by the first of two downside key day reversals near $1250 in June. Moreover gold had moved out of its usual period of seasonal performance. I also felt that gold was a somewhat crowded trade, with a disconcertingly strong bullish consensus.

That latter factor prompted me to book good profits on my two significant gold share long positions. I certainly was not bearish of gold, as you may recall, but I did want to diversify into other Fullermoney themes, not least energy, and boost my portfolio's yield in the process.

I will repeat that I remain a long-term bull of gold bullion. It is hard money and a genuine safe haven over the long term. However gold is not particularly cheap today.

Julian Baring - a splendid character who founded what is now the BlackRock Gold and General Fund, loved to value bullion on the basis of whether or not a gold sovereign would pay for dinner for two at the Savoy. Basically, gold was undervalued if a sovereign would not cover the cost of dinner, and overvalued when the price exceeded the cost of a good dinner. Today's price for a gold sovereign is £185, just enough perhaps to buy dinner for two at the Savoy, including a glass of champagne and a carafe of house claret.

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