Weekend Thoughts: Gold - John Rothe | Portfolio Manager, Quant, Tech Geek, And Sometime Superhero To My Kids

Weekend Thoughts: Gold

Gold has sold off dramatically over the past two days. I have been talking about levels of support and where gold prices might end up. However, my focus was on the short term and I should mention the longer term trend of gold:

gold-rothe

Numerous media talking heads have been talking about the end of the gold bubble, but really it hasn’t ended (if we even want to call it a bubble yet). The long term trend is still rising and September and October are historically strong months. Rumors have been floating around for the last two days that the gold selloff has been caused by leveraged equity traders covering their margin calls. (Behavioral finance 101: Investors typically sell their winning assets to pay for the losers).

The seasonal trend followers and inflation bugs may start to nibble at these levels next week as gold is very oversold at this point.

Speaking of seasonal trends, below is a post from a few weeks ago talking about the seasonal trend of gold. Enjoy!

FSAGX-john_rotheOne of the models I use in the ARTAIS Fund, is a seasonal model. The seasonal model is based on the fact that markets are historically stronger during certain periods of the year. For example, from 1940 to 2009 the average daily gain from November to May for the Dow was 27 time higher than the average gain for all other days.

The seasonal model I use takes this concept one step further – invest in the strongest sectors during historically strong periods. We are now entering a period where gold stock are historically strong.The Barron’s Gold Mining Index has shown a gain for gold stocks during the month of September 22 times over the past 31 years, sporting an average gain of +5.7%.

The returns have been very impressive for the seasonal model. We backtested the model with the following rules:

  • Invest in the technology sector at the close on the last trading day of October.
  • Sell investments in the technology sector at the close on the last trading day of January and invest in the energy sector.
  • Sell investments in the energy sector at the close of the last trading day of May and hold cash (or money market) during June, July and August.
  • Invest in gold at the close on the last trading day of August.
  • Sell gold at the close on the last trading day of September and hold cash during October.

artais_seasonalImpressive results for such a simple model.

(Disclaimer: I/my client(s) are long FSAGX and/or GOLDX and I may initiate further positions within the next 72 hours.)

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