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All That Glitters

10 Years of Gold

In my normal review of charts over the weekend (OK, so its keeps me occupied during the Bears game) I noticed how orderly the long-term performance is for gold. This 10 year chart of the gold price shows what a secular bull market should look like. I’ve drawn moving average price channels so you can see how the price has moved basically up and down 10% on either side of the 13 week moving average in a fairly steady upward direction.

The fundamentals in our economy have dictated that gold should go up as the value of the dollar has been eroded. It is easy to see the movement of the dollar over this same time frame in the chart below:

US Dollar 10 years

Its not a perfect correlation, but you can see that gold has moved up as the dollar has moved down. From an investment management standpoint, since the stated policy of the Federal Reserve is to devalue the dollar, then to counter the impact of that, you need to add gold to your portfolio.

The 24 carrot question is: what is my entry point if I don’t own any gold, or when can I safely add to what I already own?

If you look at the chart, you can see that a really safe point to initiate or to add to positions is near the bottom of the channel. That, however, is not a common event. So, when the price moves into the lower half of the channel, that has historically been a good point.

We pared back our holdings of gold and gold miners during the big rally. We will reestablish those positions when gold moves back into the lower part of the channel.

I also think that we will see an extension of the current dollar rally based upon the economic problems in Europe and its impact on the Euro. This near-term phenomenon could artificially drive down the price of bold toward the lower channel – if that happens, we will be overweighting our position.

Everything in investment management is about controlling risk – in a strange economy like our current one, raising cash on outsized rallies and putting that cash to work in selloffs is the best way to control risk and enhance returns. We’ve been employing that strategy with success so far and believe it will be the norm for the foreseeable future while the markets meander on a road to nowhere.

Mark