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Monthly Archives: May 2013

dji and gold

The above is a chart that superimposes both the gold price graph and the Dow Jones Index.

Generally, there is a negative correlation between gold and the equity markets.

During the boom years of 2006 and 2007, look at how poorly performing gold was, and we see it again during the latter part of 2011 and this year.  Every time there is good economic data on the recovery of the economies and growth story, the price of gold will drop.

However, it is a reality today that gold is an asset class that is part of the asset allocation in an investor’s wealth portfolio.  It is no longer looked upon as a traditional hedging instrument.  It has come of his own in the past 12 years.  Today, there is a deep enough and broad enough market, that is, sufficient retail, corporate, institutional and government are and have invested in gold.

Today, it could be argued that gold is a pseudo currency, it has liquidity, it has an underlying value and it can be used in trade.  When the world is flush with liquidity and interest rates are low, confidence wanes in currencies as investors feel that the underlying value of the currency is weak, given that the global economies are weak, except for the emerging markets and Asia.

I believe the worse is over the the United States and for Euroland, there are still some bumps ahead, however, both economies have exhibited resilience and tenacity, they have turned the corner.  Now, just because they have turned the corner does not mean that the road to economic growth will not have hiccups, it will and we should expect it.

We believe the medium term 3 year outlook for gold would be that it will find a base at about $1,000/-.

Right now, institutional investors, that is, the fund managers are all selling gold or calling for a sell in gold.  The gold market is extremely bias short futures which will continue to add downward pressure to the price of gold.

What is the recommendation?

If you have gold holdings or gold ETFs, do consider rebalancing your asset allocation back to more equities.  The outlook for equities is positive and yet dangerous.

Right now, equity markets are driven and supported by liquidity and not by fundamental growth in the economy nor healthy earnings from corporates.

If the transition to a healthier economy and strong corporate earnings happen when QE is pulled back and interest rates rises, than equity markets will continue to rise.  If this transition is not handled properly, then, we may see some significant correction in the equity markets.

 

I have been asked to share my thoughts about gold.

I am in the midst of putting together my thoughts on this subject, however, my initial thought is that gold has carved itself out to be an asset class to be included in one’s investment portfolio, whether from a diversification point of view , reduce correlation risks, hedge against other asset classes and currency.  This trend has developed through time beginning from 2007.

You will recall that equity markets were booming into 2007 before blowing up in 2008.  In 2007, quite a number of fund managers were beginning to diversify into gold to hedge downside risks in the equity markets and also the bond markets.

When the 2008 financial crisis came, it was a real blow to the banking and financial markets………..DISTRUST stemmed from the aftermath.  Retail and corporate investors, family offices, trusts and institutional funds decided to reallocate their monies into gold while waiting for the financial markets and regulators to sort themselves out.

The financial crisis showed up the structural and policy weakness of the financial and banking sector.  It revealed the lack of governance and compliance.

Then the economic downturn took route from 2010 to 2012, and more monies went into gold as a safe haven.

Anyway, we will be putting up a more comprehensive post shortly.

Look out for it.

Rumours that George Soros short the AUD through the option market last Monday, meant that he could have short the AUD at about 1.04, which means he is looking at a huge trading profit.

We decided to make a small bet today as we were not comfortable given that the AUD has weaken substantially from last week.

We made a quick bet and short the AUD at 1.0240 and squared the position at 1.0188 for a trading profit of 52bps or 0.51%.

We were busy for the month of April, executing 7 spot trades and 1 option trade.  Fortunately, we won on all 7 spot trades; 5 short trades and 2 long trades.

Absolute return for the month of April was 36.5%.

Our portfolio return year to date is 81.9%.

April was a good month!

We knew that the ECB rate decision was going to create volatility in the fx market.  We were not sure whether we could catch the movement when the announcement came out.

Instead, we did a proxy by focusing on the AUDUSD, knowing that it will also react positively if the Euro was going to strengthen and it did.

We long the AUDUSD at 1.0225 and square the position at 1.0270, the high was 1.0283.  We made a trading profit of 45 bps or 0.40%.

Yesterday, was a monumental day as it was the ECB rate decision day.  Lots of media coverage of the event the whole week coming up to Thursday.

It was widely expected that Draghi will cut interest rates by 0.25% and he did, down to 0.50% from 0.75%.

The Euro was extremely volatile and we could not catch the upside, however, instead we positioned ourselves for a reversal and it happened when Draghi hinted that he may do a negative deposit rate if necessary.

We sold the EURUSD at 1.3200 and squared the position at 1.3100, it hit a low of 1.3040, then again, we can’t always catch the top nor catch the bottom.

We made a trading profit of 100bps or 0.75%.