This is going to be the most subjective and least quantitative post out of the 500 odd posts I have written. I am not a gold bug, and while I have written that gold shares are attractive relative to gold in the past, I don’t see a lot of strategic value of gold to a portfolio (tactical, yes).
Gold is currently above both its 50 and 200 day SMAs. Before someone asks, yes, using a long term simple moving average increases absolute and risk adjusted returns while reducing drawdown vs. a buy and hold of gold.
That having been said, and this is probably an Occam’s 5th Grade level observation, but is there anyone out there that believes that if/when gold breaks through the 1000 level that it doesn’t zoom straight to 1300 or 1500? Once that huge psychological barrier of 1000 is broken (it has already been tested once) I think the sky is the limit.
A simple strategy would be to buy gold (futures, GLD, or gold shares are probably even better GDX) call options far out of the money. Since I have no idea when gold might break 1000 (if it ever does) it could also make sense to buy a call spread and keep rolling them over until gold gets to 1000.
Just a thought.
Update:
Lots in the academic literature on round numbers. One example:
"Currency Orders and Exchange Rate Dynamics: An Explanation for the Predictive Success of Technical Analysis.” – Osler, The Journal of Finance 58(2003):
"This paper shows that requested execution rates for stop-loss and take-profit orders cluster at round numbers, consistent with existing evidence on limit orders in stock markets. Its also shows that the pattern of clustering differs across order types and could produce the price behaviors predicted by technical analysis. Executed take-profit orders cluster more strongly at round numbers than do stop loss orders. Since take-profit orders should tend to reverse price trends, exchange rates should tend to reverse course at round numbers when they hit take-profit dominated order flow. Executed stop-loss buy orders cluster most strongly just above round numbers, and executed stop-loss sell orders cluster most strongly just below round numbers. Since stop-loss orders should tend to propagate trends, exchange rate trends should be relatively rapid after the rate crosses a round number and hits stop-loss dominated order flow."
PS Anyone remember when I wrote in December that gold was in backwardation? That didn’t last long.
PPS If there is anyone who doesn’t think that risk management is important, then you clearly don’t know anyone who (still) owns Russian stocks.
