Is gold in a bubble? There are a multitude of opinions on this topic, and of course, no one knows for sure if this is a bubble or not. Pinnacle feels that it is definitely a possibility although this bubble is more likely in the middle innings and 2011 could be another great year for the precious metal. However, over the last week or two, we had a decision to make as our rebalancing software suggested we take profits in the gold ETF owned in client accounts (GLD - the SPDR Gold Trust). Do we let the position stand and hope the outperformance continues, or do we trim the position and invest the proceeds in an underperforming position?
Our rebalancing program allows us to create models with designated weights. When the weight of the security exceeds our designated weight by 1%, the rebalancing tool suggests either a buy or sell of 1% to get back to our model weight. In this instance, GLD is currently a 5% model weight, and when the position falls to 4% or rises to 6%, the software will suggest a trade. After the vertical rise in gold to $1350 per ounce, portfolios weights in many accounts had moved to 6% and the program suggested we sell the position back down to 5%.
We decided to trim our GLD positions back to 5%. It feels like we may be approaching a short-term top as the market gets ever closer to next week’s Federal Reserve meeting. Momentum indicators have started to fall, sentiment is very optimistic, volatility has made a new low, etc. In the past, the rebalancing feature has alerted us to many overbought positions in client portfolios, and we feel gold may be due for a trend change (to a down trend or a flat trend) in the near term.
It is also interesting to note that the proceeds from the sale, for the most part, were used to purchase non-cyclical equity sector ETFs. It is interesting because risk assets usually get rebalanced into non-risk assets as the two seldom move together. This year has been an exception to the rule as U.S. Treasury bonds have risen along with risk assets. QE2 and POMOs are certainly wreaking havoc with correlations, and that is why the markets are anticipating the Fed meeting on November 3rd even more than usual.
