FMD Capital Management

The Glitter Is Wearing Off

Written by David Fabian, April 04th, 2013

The price of gold bullion hit fresh new year-to-date lows today by dropping below $1,550/ounce as many portfolio managers and Wall Street experts are reducing their stakes in the yellow metal. Typically investors flock to gold during times to economic uncertainty as a type of shelter or safe-haven play (similar to Treasury bonds). Despite all of the problems that we are experiencing in the government and political arena, the stock market has shrugged off those concerns and continued to march higher on the back of upbeat global economic news expansion hopes.

Looking at the charts of the SPDR Gold Shares (GLD) and the Market Vectors Gold Miners (GDX) we can see that both of these ETFs hit fresh new lows today and appear to be in a near free fall. GLD is now 14% off of its most recent high and nearly 7% below its 200-day moving average. The technical picture for GDX is even worse with its current price nearly 35% off of its high water mark.

The question becomes: Is it time to catch the falling knife or wait until we see a turnaround in gold bullion and mining stocks before we dip a toe in the water?

My initial inclination as a trend follower is to wait until we see stabilization in the commodity sector before starting to build into new positions. I had expected GLD to hold the $150 line in the sand where its previous low was set back in May of 2012. I believe that many investors had stop losses in that area which may have accelerated the recent sell off in gold.

I would not be surprised to be a brief relief rally in gold bullion at these levels, especially if we start to see a broad-based sell off in the markets. Investors may be able to benefit from this volatility starting to leg into small positions that they average into over time. If gold can regain its 200-day moving average then I think you will start to see a great deal of money pouring back into this asset class.

I don’t own any commodity related investments for my clients at this time but do feel that they can represent an excellent opportunity for a small portion of the portfolio. The precious metals sector represents a non-correlated asset class that has historically performed quite well as a hedge against inflation and currency risks.