View

The Gold Rally - Fools Gold or The Real Deal

December 6, 2004

 

Gold. At its base level, nothing more than an easily sculpted yellow metal. But ornaments, jewelry, and coins made of gold have been seen as signs of wealth and power in nearly every stage of human civilization. It is becoming more and more a sign of wealth in the last two years of modern civilization, as the price of gold has appreciated more than $100 per ounce since the beginning of 2003.

As Gold surged to new 16 year highs last week, moving past $450 an ounce due to continued dollar weakness, there was a buzz of excitement in the futures industry which has not been heard in quite some time. A Gold Rally ! ! It is often said that good traders need a short memory, but the excitement of gold is generated by those who have a long memory, all the way back to 1979. We don't know what kind of trader that makes them.

Much of today's infatuation with gold (from an investment standpoint) comes from the year 1979. In that year, gold was trading at $210 an ounce, then proceeded to rise all the way to $850 per ounce in 1981, before plunging back to roughly $300 per ounce a year later. This was nothing short of the most dramatic rally in commodity history, with a single gold contract appreciating more than $64,000 in a two year time span. For an investment requiring less than $1,000 in margin requirements, the rally represented a 6,300% increase and was truly the American dream. The subsequent fall to $300 is often the forgotten part of the tale, yet should be the most important.

Ever since that famous rally, speculators in gold have acted like the second California Gold rush was on every time Gold moves higher, pouring money into gold futures and gold based investments. These investors have inevitably been wrong more than they have been right, earning them a reputation of wild eyed, beyond the edge fanatics looking for $1000 per ounce Gold, and the nickname Gold Bugs. Professional investors, meanwhile, continued to sell Gold against small traders thought much of the past 20 years, creating big losses for so called Gold Bugs.

The problem has been a steady decline in the demand for gold ever since 1980. With little to no industrial value, and the signal of banks world wide that they were selling their gold reserves, Gold has been in a steady decline since the 1980s, failing to make higher highs in each of its sustained rallies.

But the current gold rally seems a little different, as it appears to be driven by more than the memories of the often wrong gold bugs. There are two Exchange Traded Funds (ETF) being launched specifically to allow small retail investors a way to invest in Gold, the streetTracks Gold Shares, symbol: GLD, and the iShares Comex Gold, symbol: BGI. Whether its the sign of a top in gold or a sign that there will be more demand to drive prices higher is yet to be seen.

The basis for any belief that gold can sustain such a rally lies in the weakening dollar, and belief that gold may challenge the dollar's dominance as a safe haven in times of uncertainty and rising inflation. We can easily see that we live in times of uncertainty any time you turn on the TV, and the effect China is having on rising commodity prices is evident, making this is a very real possibility. But increased productivity and a lot of room to increase rates should keep inflation in check. There is also the chat room belief that gold is the new currency of organized crime and terrorists, given the increased scrutiny and regulations surrounding money laundering after 9/11.

The basis for gold falling back to somewhere in the $300 - $400 level is that gold has little to no economic value. National currencies are no longer based on a gold standard, and Copper and Silver are better electrical conductors. That leaves just two groups as drivers of the price of gold. One, the consumer and what they're willing to pay for gold jewelry, and two, the nervous investor with a safety deposit box full of gold coins.

This investor recommends staying away from the gold rally. Gold will not be returning to $800, and it will very likely not even return to $500. Most of those who remember 1979 and believe in fools gold are already long, challenging the much stronger and smarter commercials.

From a trading system standpoint, having Gold in your trend following system portfolio has been about as profitable as buying gold over the past 10 years. Across seven different trend following systems, just one system was profitable in the Gold since 1990, with the average gain/loss across all trend following systems being a loss of ($13,250). The most likely reason for trend followers poor performance over the past ten years is that the market was a poster child for choppiness. The market had a range of only about $50 between 1993 and 1996, and until this most recent upmove hadn't had a trend to speak of. Whatever form of investment you use, Gold doesn't seem to be a good investment.

- Jeff Malec

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.

Feature   |   Week In Review   |   Chart of the Week   |  

Chart of the Week : November Performance Summary

Feature   |   Week In Review   |   Chart of the Week   |  

The dollar amounts shown below represent the actual profits and losses achieved on a single contract basis in client accounts, and are inclusive of a $50 per R/T commission ($30 per emini). Except where noted, the gains/losses are for closed out trades. Percentage gains/losses are hypothetical and based on developer recommended initial balances as listed at www.attainaccess.com. There is substantial risk of loss associated with these investments. Please carefully read the important risk disclaimers below.

Typically investors can be divided into two groups, those who are diversified, and those who are not. This is especially true for system investors as many customers get too caught up in one type of trading, whether it is day trading, swing trading, or long term trend following.

SP day trading is the most exciting, and for much of 2004 was the most profitable form of system trading. A popular diversification strategy amongst day traders is to trade multiple SP day trading programs, by several different developers, all with different risk levels, but this is not a complete diversified approach - as they remain locked into just one time frame (day trading)

After a November which saw losses across all day trading systems at Attain, any investors with trend following exposure will tell you that a better option is to include both swing trading and long term strategies in the portfolio. While neither option is as sexy as day trading, these strategies should help reduce volatility in the portfolio and smooth out the equity curve.

Many investors have shied away from long term trend following systems because of their ultra poor performance throughout the second half of 2003 and the first three quarters of 2004. Surprisingly, none of the long term systems hit its statistical stop trading point throughout these draw downs. (In comparison, at least 5 SP day trading systems have hit statistical stop trade points in 2004.)

November was a great month to have exposure to long term trend following systems. Systems such as Andromeda, Synergy, Checkmate, Brix, Aberration Plus, and LaJolla posted big gains in the foreign currencies, grains, and metal markets.

Foreign currencies were the largest movers as the U.S. Dollar continues to get battered. The Swiss Franc had the biggest move rising +4.72%, followed by Eurocurrency which was up +3.95%, and the Japanese Yen which gained +2.91%. T the Dollar Index lost -3.57% for the month.

Gold was also affected by the weak dollar, rallying +5.00%, while U.S. bonds fell 2.44%. Foreign bonds continue to rally with the Eurobund rising +1.10% and the Swiss Government Bond gaining 1.13%. Finally, Grains continue to move in favor of the systems as well with wheat falling -8.09% and corn dropping -4.79%.

**Day Trading**

As alluded to above, November was a difficult month for day traders. Choppy markets coupled with several large intraday moves against the systems proved too much to overcome. Magnitude ES was the top performing system making +$190.00 per e-mini contract. Clipper e-RL was also able to get in the black making +$38.40 per contract.

Outside of these two systems it is difficult to find anyone else in the black for the month. Systems in the red include Daybreaker SP (-$150.00 per contract), BWT 3.0 SP (-$207.50 per contract), RC Success ES (-$105.00 per e-mini), Impetus eRL (-$161.70 per e-mini), Cipher ES (-$647.50 per e-mini), AG Xtreme (-$1050.00 per contract), R-Mesa 5 SP (-$2919.00 per contract), RC Miracles (-$3575.00 per contract), Compass SP (-$4075.00 per contract), BWT 2.1 (-$4345.00 per contract), and Helix SP (-$7478.75.00 per contract).

**Swing Trading**

The swing traders performed somewhat better than the day trading systems, although there was not a stand out system in November. I-Master made +$805.00 per contract in the e-mini SP, but took losses of -$1780 per contract in the NQ, -$4246.00 per contract in the e-RL, and -$1150.00 per contact in the e-MD.

Tzar was very quiet in the NQ and e-RL, but profitable elsewhere, making +$470.00 per contract in the NQ and +$11300.00 per contract in the e-RL. Tzar ES was not as fortunate losing -$2005.00 per contract. Axiom also had mixed returns. The systems lost -$1602.50 per contract in the ES but the system is holding long for open trade profits of +$1100.00 in the e-mini Midcap. Axiom e-RL did not trade.

Finally, Eclipse e-RL, the most recent addition to the swing trading offerings at Attain, is holding long for open trade profits of +$2435.00 per contract in the e-RL.

**Long Term**

As we discussed in the opening paragraph, November was a banner month for long term, trend following systems. The losses suffered by other types of trading could have been offset by gains in the foreign currency, foreign bond, metal, and grain markets. Because long term trend followers are typically in 25 to 30 trades at one time, in a variety of markets, it is possible to have instant diversification inside on long term portfolio. For example some of the winning trades held in November across several markets include: (All open trade data is reflective of Friday, December 3 closing price.)

  • Andromeda: +$10,375.00 in Eurocurrency, +$3600.00 per contract in corn, and +$3590.00 in gold.
  • Synergy: +$550 profit target in corn, +$5812.50 in Japanese Yen, +$9562.50 in Swiss Franc.
  • Checkmate: +$4075.00 per contract in Eurocurrency, +$4812.50 in Japanese Yen
  • Brix: +$5337.50 in wheat, +$1476.00 per contract in U.S. Bond.
  • Aberration Plus: +$5875.00 in Japanese Yen, +$4950.00 per contract in the Eurobund.

Although these results are impressive not every trade is a winner. In fact most long term systems have more losing trades than winning trades. The key is to cut losses short and let profits ride. A sample of losing trades includes:

  • Andromeda: -$5450.00 per contract in Palladium
  • Synergy: -$812.50 per contract in KC Wheat
  • Checkmate: -$475.60 per contract in Sugar, -$812.50 per contract in KC Wheat.
  • Brix: -$1212.50 per contract in Soybeans, -$823.44 per contract (open trade loss) in US ten year note.
  • Aberration Plus: -$579.66 in US two year note, -$2800.00 per contact in Nikkei.

Please Login to: http://www.attainaccess.com for the latest updated statistics.

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.

Feature   |   Week In Review   |   Chart of the Week   |