We’ve posted quite a bit recently on Gold’s major fluctuations between all-time highs and rapid sell-offs. With Gold continuing the roller coaster (down another $40 at the time of this post being written), we decided it might be time to bring in a gold specialist to comment.
Enter Cervino Capital Management. Their Gold Covered-Call program specializes in buying Gold futures and protecting against down moves such as these via option strategies (though this does not provide a guarantee against losses). You can learn more about it in our 2010 profile of the program. In the meantime, Davide Accomazzo of Cervino had this to say about the recent moves and what comes next:
[DISCLAIMER: PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. FUTURES TRADING IS COMPLEX AND PRESENTS THE RISK OF SUBSTANTIAL LOSSES.]
The recent volatility of gold should not be surprising to investors. The shining metal has a long history of violent swings to the upside and to the downside which are a reflection of what gold represents: a 5,000 year hedge against fear. Gold in itself produces no cash-flows and has very little industrial demand, therefore its price is largely dictated, and more disproportionately so in the last few years, by speculative flows. In a world of disappearing trust in governments and institutions, 5,000 years of trust become a useful characteristic. However, speculative funds are by definition short-term and often leveraged, contributing to waves of swift and forced liquidation. The recent 400 point sell-off in gold is just the most recent example of gold volatile nature.
From a technical perspective, we expected gold to retrace to at least 1600 as that represented the level of the latest break-out. We note that the December futures hit an overnight low of 1532.7, just a little higher than the 50 week moving average presently at 1500.63. The 50 week moving average has been a good trend indicator containing most retracements in the last few years. Only in 2008 such level was broken significantly (albeit briefly) in the midst of the Lehman Brothers meltdown.
Looking forward, we continue to think that gold has regained an important place in most asset allocation models; therefore it should find a constant bid even though regular corrections will still mark its tempo. The most likely scenario at this juncture should be a period of churning as the metal finds its new equilibrium and as it allows for a partial rotation of ownership from the most leveraged and shakiest hands to the longer term players. Of course, just like all markets these days, we remain very headline driven and should the Europeans fumble their responsibilities one more time, gold should find its footing much more quickly.
Our strategy was built to respond exactly to this unnerving nature of gold. Having a long term upside bias is one thing…being able to hold the position when in the midst of such highly volatile moves is quite another. We built our collared strategy to capture the long term upside bias while significantly protecting our downside exposure. We were always going to underperform parabolic moves to the upside but over the long term we should produce positive returns with much less volatility. Volatility is a good friend of traders but a scary enemy of the longer term investor. Gold demands a long term commitment as the financial and political world will require a long time to rebuild trust with the public.