What Goes Up…

Gold has been powering ahead and we watched in awe as our hedge worked fantastically over the last month. Stocks fell 17% but gold rose 21%, and this parabolic-esque move seemed too enticing to ignore. The price of gold stretched to 20% above its 200-day moving average which historically is a very overbought level. So we decided to act, reducing our gold target for the five models we run from 4% to 3%. The price of gold at the time of our sale was around $1775 per ounce (marked by the green line in the chart below). The next 7 trading days were hard to watch.

The rise continued, and I’m sure Ken was grinding his teeth since he was reluctant to sell. Our 3% position moved to $1917/ounce, an 8% move, during the trading day on August 22nd. The term gets used a lot today but gold was possibly entering bubble territory. That was 3 days and $158 dollars/ounce ago as gold fell to $1760. That is a two day, 9% move lower. What goes up, must come down, and many times it will plummet.

This parabolic rise and quick fall is eerily similar to the movement of silver in April and May. Silver lost 25% of its value falling from $40/ounce to $30/ounce in a few weeks. If gold follows that pattern the price could fall to $1450/ounce. That is not our base case but we did feel the rapid rise needed to be addressed.  Now that it's falling, we may be looking for an opportunity to increase our position again. You have to love tactical management!