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Gold Exposure through Managed Futures Accounts
December 7, 2009
We apologize to all of you holding long gold positions out there, but we can’t help but feel a little blame for Gold’s big move down over the past two sessions (down -$60 or -5%). You see - with Gold all over the news everyday and doing well (as of last Thurs) for a lot of managed futures portfolios, we decided last Thursday night to go ahead with a Gold newsletter today.
And wouldn’t you know it - the decision to make the topic Gold had barely been made before the price of Gold decided to tank last Friday (and continue the sell off today). This brings a new twist to the conversation(is the rally over?), but Gold remains up ~30% for the year even after the sell off and has represented a well defined up trend most investors are aware of and can identify with.
Past Performance is Not Necessarily Indicative of Future Results
This well publicized up trend is a good example of how commodity markets can trend (which is somewhat ironic because Gold has long been one of the worst trending markets, being subject to wild reversals from time to time), and allows us to ask the question: Have managed futures programs, which are generally speaking designed to capture such trends and profit from them; participated in the Gold rally? Will they struggle if the current sell off turns into more than a curiosity and into a full fledged -20% to -40% correction?
We asked various managers we work with what they have been doing in Gold this year, and there have been quite a few programs that have done well trading gold in 2009, the grand majority of which are systematic multi-market programs. View our managed futures strategy focus newsletter here.
Most of the multi-market, systematic programs (using some sort of trend following or another) that we track caught the rally in late summer when Gold was trading around $1000 per oz. Systematic, long volatility programs typically do best when there is a period of congestion that is followed by a big trend in the market. In this case, Gold spent most of 2009 trading between 950 and 1000 before breaking out in the first week of September. The subsequent upward trend ran all the way up from 1000 to a high of 1227.50 on December 3rd (a gain of 22%)
This was a tailor made trade for many systematic multi-market (trend following) strategies. One manager we actively track, 2100 Xenon, notes that approximately half of their monthly estimated returns came from Gold in November! (Past Gains Are Not Indicative of Future Results) Likewise, APA’s programs would have been flat to negative in Nov. if not for the Gold and Silver rally.
Other Notable multi market managers that caught this breakout trade include Claughton Capital LLC, Covenant Capital LLC, Global Advisors Commodity Systematic, and Integrated Managed Futures Corp.
We asked several managers who we track how they performed in Gold so far this year, and have listed the results in the table below. Please note this does have some self reporting bias, as managers who didn’t respond may very well have not responded because they have lost money in Gold this year (or they don’t trade it).
Past Performance is Not Necessarily Indicative of Future Results.
2009 Gold P/L
Source: Individual Managers, All values estimate as of 12/03.
The question for those looking for Gold exposure (and even for those who currently have some Gold in their portfolios) is whether you want simple, blind Gold exposure, or do you want so called smart Gold exposure which can get out when the trend ends, and even go short should it reverse and go back down to $500.
We cover down below the best way (in our opinion) to get simple ‘blind’ exposure which simply tracks the price of Gold, and the managers listed above represent some of the ways you can get so called smart Gold exposure. Now some of you may be asking: why would I want any of the so called smart exposure – which grossly underperforms the price appreciation of Gold (+30% for the year versus +5.5% for the top manager Covenant)?
The difference is in the investment amounts. The Covenant gain of 5.5% in Gold represents about $27,500 on their initial investment amount of $500,000. Perhaps not coincidentally, Gold was up approximately $220 this year at the time we got that estimate, and the value of the contract is $100 per $1 move. So we can see that being long Gold the whole year has resulted in gains of about $22,000, meaning Covenant has not only captured all of that move, but even done a little better.
We questioned each of the above managers on where they entered their Gold positions, and we can say most managers have not been involved in the trade since the lows made in Nov. 2008 at the peak of the financial crisis (Gold was not acting like a safe haven then, instead selling off in lockstep with equities and other commodities). Most missed the initial surge off those lows, as it came quite quickly and had a relatively large risk attached to it (and the longer term trend was still down).
But by the time we hit 2009, market conditions had settled down somewhat and the trend in Gold had been pointing up since mid November – meaning those managers’ whose models look for early trend entries were starting to consider Gold. The rest would get in line with the uptrend from April through September, as each new high represented a confirmation of the uptrend.
Elsewhere, trend followers haven’t been the only managers who have benefited from Gold exposure. For example GT Capital Management, a short term discretionary manager, has done well trading the short side of Gold over the past two days, making approximately 1%. (Past performance is not necessarily indicative of future results). The GT program is discretionary, and the manager looked to catch a short term correction in the gold market thinking it was a bit overbought (good call!).
Finally, Cervino Capital Management has just launched a new CTA program which is focused on providing “alpha enhanced” Gold exposure. Alpha enhanced is just a fancy way of saying they will try and enhance the returns and reduce the risk inherent in the Gold exposure. The program is called the Gold Covered Call Writing program, and Cervino intends to maintain a perpetual long gold futures position by “rolling the futures contract forward” to deferred-delivery futures contracts, and writing call options on the underlying gold futures contracts either at or very near the money, thereby providing additional income and a small amount of protection should the price of Gold not appreciate. Please call us for more details on this program, as the first client just started in November and there is no performance or information posted on our website yet.
Convinced Gold is going to $2,000 and beyond?
If you are unimpressed by the possibilities of the so called smart Gold exposure through a professional managers – and just want to be long Gold, being convinced Gold is the place to be in this new environment of cheap money and government stimulus. Or if the idea of having both the simple and smart Gold exposure at the same time intrigues you - make sure you read our newsletter from earlier this year on the most efficient way to get Gold exposure.
We cover in that newsletter how buying gold bars or coins is not a good way to get Gold exposure, costing you a 10% to 20% premium over the current price of gold to get in and out, which will severely hamper your returns even if Gold goes up as you forecast. And we cover how Gold mining companies have their own set of issues, chief among which is that they are companies, not direct proxies for the price of Gold.
The most efficient way to get Gold exposure, in our opinion – is to purchase a futures contract on Gold, and then take delivery when the contract expires. The futures price will be the closest you can get to the spot price, and nowhere near the huge premium you’ll pay to buy gold bars or coins from an online dealer or jeweler.
Once you are delivered on, you then own 1,000 ounces of Gold through your futures account. The Gold is held in an approved warehouse of the futures exchange, and you get a warehouse receipt posted to your futures account. Now here’s the good part – you can use that warehouse receipt as if it were cash in your account. That is, it can be used to cover the required margin for other trading and positions.
Much in the same way clients of Attain can purchase Treasury Bills, or keep their account in Euros, Aussie Dollars, Japanese Yen, or other currencies so as not to decline with the US Dollar, those who think the price of Gold is going up (and/or that they would rather own Gold than paper money) can hold their account in Gold (through the warehouse receipts).
And with individually managed accounts ability to use notional funding – there is no extra capital outlay to enlist one of these cash/US Dollar alternatives. The same money an investor puts up to meet the minimum investment amount of a managed futures program can be used to buy Gold, T-Bills, or foreign currencies. It is sort of like the money gets used twice (which is obviously more cost effective and efficient than having to use twice the money).
Here are just a few of the options for what can be held in your managed futures account in addition to or in place of cash.
- A Treasury Bill earning almost 0% (currently about 0.15%)
- Euros, Yen, Aussie (or some other currency) and earn or lose an amount equal to the Euro’s gain/loss versus the US Dollar each year.
- Purchase Gold futures and get delivered on, thereby converting the account to Gold and earn or lose an amount equal to gain or loss in Gold prices each year (less the storage costs).
There are other alternatives we don’t have space to touch on here, such as using your normal stock and bond holdings, purchasing longer dated (5,7, 10 yr) US Treasuries, or getting delivered on other commodities such as Crude, Soybeans, Silver, etc. Please contact us if you would like to explore how any of those alternatives would work.
In conclusion, there are more sophisticated (read: cheaper) ways to get Gold exposure, and managers who can give you ‘smart’ Gold exposure by going long/short/flat depending on market conditions. If you’re looking for Gold exposure, be smart about it. It is never wise to overpay for something, and active management could prove better than simply buying and holding the yellow metal.
- Walter Gallwas
IMPORTANT RISK DISCLOSURE
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Most market sectors enjoyed a rally in November as favorable economic news in most areas of the world and a constructive end to earnings reports in the U.S. helped support price activity, although news of debt trouble in Dubai did take some of the starch out of some price increases. Economic reports were again construed as improving as several releases pointed to renewed manufacturing and building growth especially in Asia, although numbers in some European countries were a bit softer than early estimates. The monthly FOMC results were in line with expectations with more of the same as they held rates steady with indications that this might be the norm for the time being. Last month’s indications that some of the recent stimulus programs will be slowed were not really highlighted during this meeting. The marketplace remained fixated on the potential for inflation and strong emerging market growth after several rounds of stimulus injection not only by the U.S. government, but other foreign countries which have sparked large moves higher in several commodities. The Metals complex is one sector that has benefitted from such ideas along with Chinese consumption prompted by their continued plan of building a larger stockpile for several hard and consumable assets. For the month Silver futures ended +13.75%, followed by Gold futures +13.52%, Palladium futures +12.59%, Platinum futures +9.72% and Copper futures +6.83%.
U.S. stock index futures posted a strong rally for the month which was led by the last bit of 3rd quarter earnings reports coming in stronger and better than expected economic data, although the troubling debt news from Dubai did but the brakes on a steeper advance. The news from the FOMC meeting indicating rates would remain low for an extended period also aided market activity. The Dow Jones 30 futures +6.93% led the way up followed by the NASDAQ 100 futures +6.12%, S&P 500 futures +5.98%, Mid-Cap 400 futures +4.05% and Russell 2000 futures +3.10%.
The Food and Ag sectors were mostly firm in November as pro growth inflation support along with issues regarding weather sparked decent support. Activity in the grains saw Wheat +14.51% on planting delay worries for SRW wheat with Corn +10.07% and Soybeans +8.60% rallying on more harvest delays due to heavy moisture in the U.S. Midwest and strong Chinese demand. The livestock sector saw Lean Hogs +5.14% finding support from improved export demand and Live Cattle -1.30% continued to be hampered by lagging domestic seasonal demand. Soft commodities mostly featured demand rallies with Cotton +5.35%, OJ +2.97% and Coffee +2.49%. Cocoa -2.22%and Sugar -0.75% were under pressure from ideas that recent crop worries have subsided for the time being.
Market activity in currency futures was again mixed as the U.S. Dollar Index declined by - 2.01% for the month and the British Pound lost -0.07% on worries of further job market deterioration and stronger emerging market growth. The biggest increase against the U.S. Dollar was the Japanese Yen +4.31% as support stemmed from news that the new government sees economic growth and exports rising in the future. The Swiss Franc +2.06% and Euro + 1.97% were aided by the strong rally in metals.
Bond markets posted a nice rally in November as strong results from government auctions supported the 30-Year Bonds finishing +2.58 % and the 10-Year Notes + 1.90%.
The Energy complex was a mixed bag last month as heavy supplies kept a cap on most products, although RBOB Gasoline futures +1.52% rallied on news of stronger demand estimates for future years. The balance of the complex ended November as follows Natural Gas futures -10.06%, Crude Oil futures -0.46% and Heating Oil futures +0.48%.
November was a good month for multi-market managers. This comes as welcome news to investors who have seen multi market CTA’s struggle throughout 2009. The top performing manager was Clarke Global Magnum with returns of +19.05% est. for the month. Not surprisingly Clarke Global Basic was right behind its sister program at +13.46% est. Other managers that had real nice months include Integrated Managed Futures Global Concentrated +5.98% est., Robinson Langley Capital +3.00% est., Hoffman Asset +3.75S% est., Futures Truth SAM 101 +2.30% est., GT Capital +2.23%S est., Attain Portfolio Advisors Strategic Diversification +2.02% est., Attain Portfolio Advisors Modified Program +1.18% est., and Mesirow Absolute Return Program+0.83% est. Mesirow Low Volatility Program was near breakeven at -0.02% est.
Multi-market managers who struggled in November included Futures Truth MS4 -0.10%, Sequential Capital Management -1.04% est., Dominion Capital Management Sapphire -1.21% est., Quantum Leap Capital Management -3.29% est., and Dighton Capital USA Aggressive Trading at -5.74%S est.
Short term index traders had a successful month of trading with Pere Trading Group LLC making an estimated +5.08% est. while Paskewitz Asset Management Contrarian 3X St. Index was up +0.67% est.
As an asset class, Option trading managers rebounded from their mixed October returns and appear to be the front runner for 2009’s top investment strategy. In particular, it has been the diversified traders like FCI and HB Capital who have had the most success capitalizing on the volatility of markets like Gold, Silver, Soybeans, and Currency.
For November, the top performer was Raithel Investments with an estimated return of +6.37% bringing their 2009 returns to +2.90%. After suffering a loss of -6.59% in January, the program has been extremely consistent posting positive returns in 8 out of the next 10 months. Raithel Investments focuses exclusively on collecting premium through the sale of options on the S&P 500 stock index futures. Other estimates were as follows: ACE Investment Strategist +3.47%, Cervino Diversified Options +1.68%, Cervino Diversified 2x +3.27%, Crescent Bay PSI +4.20%, Crescent Bay BVP +6.85%, FCI OSS +4.62%, FCI CPP +2.81%, HB Capital +0.90%, and Oak Investment Group +5.14%.
Specialty trading manager Emil Van Essen was the top performer of the group in November with an estimated gain of +1.24% brining his 2009 total up to +19.9%! Van Essen’s uniqueness is derived from his systematic approach for tracking the intra-market spread differentials across a wide range of commodity markets. For more information on his trading strategy please reference our July 27, 2009 Managed Futures Spotlight: http://www.attaincapital.com/managed_futures_newsletter/344. Elsewhere, other Specialty manager estimates were as follows: NDX Abednego +0.12%, NDX Shadrach -0.04%, and Rosetta -1.77%
Trading systems had mixed performance in November with most swing trading systems finishing the month ahead while day trading programs experienced a much wider range of results with a lot more volatility. Swing trading systems were able to capitalize on several overnight moves in both directions while day trading systems generally got caught up in intraday reversals that followed those same moves. There were of course some exceptions of swing programs that were down for the month and day trading programs that had modest success for the month.
Beginning with the swing trading programs, Strategic SP and ES had breakout months for their respective contracts, +$13,345 and +$2,680 respectively. The Strategic programs were equally affective on both sides of the market, equally split between long and short trades for the month and adding to a strong performance in October after struggling in the 3rd quarter. Shifting over to bond trading programs, Jaws US 60 and Jaws US Daily were up +$2,093.43 and +$97.50 respectively. Other systems able to finish the month in positive territory include: Waugh Swing ES +$1,790, Bounce ERL +$470 and Ultramini ES +$150. On the losing side, Polaris was -$152.50, Bam 90 ES -$1,996.25 and Bounce EMD -$2,105.
Shifting over to day trading models, the BounceMOC programs had stellar months + $1,074 in the ERL and +$860 in the EMD. Compass SP was very selective in November with just four trades for +$1,025 proving that quality, not quantity is what makes an effective system. PSI! ERL was the only other day trading program to finish the month higher up +$245. Day trading systems finishing the month in the red include: ATB TrendyBalance v2 Dax -€547.5, BetaCon 4/1 ESX -€190, Clipper ERL -$880, Freedom ES -$370, Rayo Plus -€2,835, Upper Hand ES -$225 and Waugh ERL -$1,593.19.
IMPORTANT RISK DISCLOSURE
Futures based investments are often complex and can carry the risk of substantial losses. They are intended for sophisticated investors and are not suitable for everyone. The ability to withstand losses and to adhere to a particular trading program in spite of trading losses are material points which can adversely affect investor returns.
Past performance is not necessarily indicative of future results. The performance data for the various Commodity Trading Advisor ("CTA") and Managed Forex programs listed above are compiled from various sources, including Barclay Hedge, Attain Capital Management, LLC's ("Attain") own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.
The dollar based performance data for the various trading systems listed above represent the actual profits and losses achieved on a single contract basis in client accounts, and are inclusive of a $50 per round turn commission ($30 per e-mini contracts). Except where noted, the gains/losses are for closed out trades. The actual percentage gains/losses experienced by investors will vary depending on many factors, including, but not limited to: starting account balances, market behavior, the duration and extent of investor's participation (whether or not all signals are taken) in the specified system and money management techniques. Because of this, actual percentage gains/losses experienced by investors may be materially different than the percentage gains/losses as presented on this website.
Please read carefully the CFTC required disclaimer regarding hypothetical results below.
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN; IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK OF ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL WHICH CAN ADVERSELY AFFECT TRADING RESULTS.