Monday, March 28, 2011

Watching Gold Closely

Lately we’ve been watching the price of gold closely. What’s on our mind is that despite extreme havoc in the Middle East, a nuclear disaster in Japan, and a nasty plunge in dollar, the shiny metal has not been able to break convincingly to new highs. Late last week some analysts were noting a key reversal in gold on Thursday when it started up on the day and broke to new highs, but then reversed suddenly intraday and ended the session in the red. That day we did note that there was an increase in margin requirements on silver, which clouded the picture of whether it was showing a very bearish pattern, or just reacting to a short term event.

At the moment we hold 4% gold in our portfolios as a hedge for many things: inflation, banking system risk, geopolitical tensions, terrorism, money printing, potential flight from the dollar, etc. We still believe there are structural risks in the world, and therefore it makes sense not to abandon the asset class completely at this juncture. But we are contemplating bringing down exposure on a tactical basis if it breaks down much further. Why is gold dropping? It could be that the dollar is ready to bounce, it could be that real interest rates are set to rise, or maybe it’s a simple as Warren Buffet saying he doesn’t like it. Any way you slice it, it’s a volatile asset, and we must assess how much of the glittery metal we want to own at any point in time. We’ll be mulling this over and watching the price action closely.