Celestino Brunetti @celesh: "Let's talk about: $GOLD -..."

Italy

Let's talk about: $GOLD - Part 3 Dear copiers, investors and followers, In Part 1 we looked at the forces that move the price of gold. In Part 2 those same forces explained why gold struggled during the recent events in Iran. Now I want to talk about my own position. One note on the time frame first. In my portfolio gold is a structural position, built with a multi year view. It is not a trade based on a single central bank meeting. The thesis An energy shock of this scale can leave a mark on the economy even after tensions ease. If growth slows, the Federal Reserve will have to choose between tolerating a recession and easing policy with inflation still high. Here the framework from Part 1 becomes useful. If policy eases, real rates fall and the dollar weakens. The two forces that work against gold today would turn at the same time. In the short term the picture remains uncertain. At its July meeting the Federal Reserve left rates unchanged, but three members voted to raise them, and in the days that followed they repeated their position. In the June projections nine officials saw at least one hike before the end of the year. At the same time, the easing of tensions in Iran has pushed oil lower and weakened the dollar, and this has given gold some relief. It is a real improvement, but it rests on negotiations that have not truly started yet. How I am operating I started to accumulate gold exposure below 4400, and I kept adding as the price fell, down to 3900. In general, if I believe an asset can be worth more in the future, I buy into weakness. My strategy from here is the following. If gold falls, I add to the position, with a target allocation of 15-20% of the portfolio and always entering in tranches. If it stays around current levels, I wait. If a recession arrives and the Federal Reserve starts cutting rates, I build the rest of the position quickly, because markets today react fast and a recovery in gold could be sudden. This is not an all in position. It is a gradual allocation, built over time. Which instruments I use I build the exposure through listed instruments backed by physical gold: $8PSG.DE (Invesco Physical Gold ETC), $GLDM (SPDR Gold MiniShares Trust), $GLD (SPDR Gold) and $IAU (iShares Gold Trust). I split the allocation across four instruments for three reasons. The first is issuer and structure risk. It is a rare risk, but over a multi year horizon I prefer not to rely on a single issuer, custodian or legal structure. The second is market hours. I hold instruments listed both in Europe and in the United States, and this lets me operate across different time zones. The third is operational flexibility. A small part of the position is in $GLD, which has a higher management cost but can be traded 24/5 on eToro. I keep it so I can act if something moves sharply outside regular market hours. Costs matter over a long horizon. This is why my two largest positions are also the ones with the lowest management cost, which keeps the weighted average cost of the whole exposure low. What can go wrong There have been periods in the past when gold suffered for a long time, and they need to be taken into account. The two great bear markets in gold were both driven mainly by positive and rising real rates. After the 1980 peak, gold took almost thirty years to return to those nominal price levels. After the 2011 peak, it took nine years. So the main risk is not only how far gold can fall. It is how long it can go nowhere. That is a scenario worth taking seriously: not a crash, but years of nothing while capital sits there. It should also be said that real rates never acted alone. In both cases they came together with a strong dollar and a solid growth backdrop. And since 2000 there has been only one bear market in gold. What I watch I watch three things: the real yield on US government bonds, the strength of the dollar, and the pace at which central banks buy gold. If real yields and the dollar fall together, the environment turns more favourable for gold. If central bank demand slows significantly, one of the key supports of my thesis weakens, and I would have to reassess the position. Until then, I follow the plan and adjust if the data changes. Ad maiora This post is for informational and educational purposes only and does not constitute financial advice or a solicitation to take on risk. Every decision remains the sole responsibility of each investor.

Not investment advice. The author may have financial interests in the mentioned instruments.