The focus this week (Week 19) is on Commodities and, in particular, Gold

GOLD (Comex)

In the spotlight this week is the, some might say, surprising negative price activity of Commodities as Equity markets retreat. So why is Gold going down?

The usual reference to the defensive “safe haven” status of Gold in such times raises the question of asset Class correlations. The recent changes in the spectrum of the Volatility landscape, invoke memories of a horrible 2008 which, many will remember, was characterised by almost everything collapsing ( apart from Volatility). This was also the point when accepted  Value at Risk (VAR) model assumptions and Risk management Systems led to crystalising losses and severe Portfolio Capital erosion.

Many Commentators still believe that we are in the midst of a multi-decade Bull market in Commodities. They may be right. If Gold or Commodities represent 1% of you Portfoilio, whether or not Gold Collapses in the short term, whilst unwelcome, will not necessarily have a devaststing effect on your portfolio. However this is not the case if it represents 7% of your portfolio and your Risk Appetitite is classed as anything other than High.

Modern Portfolio Theory suggests that there will be off-sets to compensate for one failing Asset Class ( unless we repeat 2008). But History does repeat itself and it seems we are pretty poor about learning our lessons. When market trends are so Persistent, we continue to be lulled into a false sense of security and fail to heed the warning signs that too often are staring us in the face.

The Chart  below shows an Extract from the Sinergi TACT Reports on Commodities (CRB Basket) and a specific Sinergi Daily Chart of Gold (Comex Future) highlighting the recent deterioration of prices from the Aug 2011 (High   $1,930) and the current NEGATIVE (Red) trend and our “Underweight” scoring. What does this mean? Well, we don’t make forecasts but there is no suggestion that the trend is finished at the moment.

Gold (Daily) 16 May 2012

IFA On Line today profers an insight from the Telegraph about  Gold “Gold falls into bear market territory” but the article distinctly fails to give any evidenced based answer other than “people are selling to cover other losses” What a load of c*ap.

Too often Market Commentators assign a reason or an event to market behaviour after the fact. We believe in Back testing price action that removes the issue of having to rationalise something after the event. An Economist may always prove to be right ………………eventually………….. but it is impossible to make consistently  prudent investment decisions on short term  “News” or “economic Sound bites”.

We believe that a Systematic approach is the ONLY way to identify whether your Investment tools have worked in the past and stand a good chance of continuing to do so in the Future.

Following on from our question in the middle of March regarding the FTSE’s ability to top 6,000, we have highlighted the importance of Volatility in what we do. In doing so, we believe that we have seen a pivotal moment in the March turnaround of the Volatility Index (The Vix) and the “topping out of the FTSE near 6,000 and the US S&P Index  just above 1400”.

As we have said before we don’t forecast but we do look at the evidence. The evidence in the table below indicates that there has been a significant increase in Fixed Interest volatility (Blue) rising significantly towards levels seen in 2008 (Red).

In conclusion, we need to be alert for a repeat of  “fat -tail” events when the things that very rarely happen, do, but also do so for a much longer period than expected. The Table below also shows the respective volatility of other Asset Classes versus the volatility experienced in the destructive events of 2008.

To us the answer is clear. Look at the recent jump in interest rate Volatility……….an early warning for those who not only hold gold but have been involved to an greater extent in the recent Bull run. We shall continue to do what we do in our reports, on Twitter and through our Blog. Follow:

Keith Reid
Keith Reid
Keith’s training as an accountant and auditor has emphasized the importance of evidence in all good decision making process. The ability to monitor management processes effectively is a key to making the most of business opportunities. Both Keith and Gerry believe that this priority for capital preservation is the common principle that sets the framework for any sound investment strategy or business model.