“Are losing theirs and blaming it on you…” (Rudyard Kipling, “If – “)
Gold, that Barbarous Relic, has perplexed the wealthiest and cleverest over the millennia and continues to confound the MitonOptimal Monday morning investment discussions.
This cauldron of mankind’s hopes and fears over the millennia has been a measure of everything from Pharaohs’ greed to paupers’ fears to a signalling device for Central Bankers and diversification in the digital era. It is like the weather in the English Channel – the convergence of multiple different systems, any one of which may dominate on any given day, but none of which is possible to predict with consistency.
However, we persist in believing that we can. I remember trading gold in the era of restrictive monetary policies in the late 1980’s. The prevailing monetary policy – championed by US Federal Reserve chair, Paul Volker, who passed away last week – was to discourage inflation, not to encourage it. In an environment of high interest rates globally (18% in SA), we were paid to be short of gold. Add the “folly of governments” (Gordon Brown and the Bank of England), which was punished by George Soros and the Quantum Fund, and gold was being sold almost indiscriminately and irrationally by the Bank of England.
Being paid to be short while the gold price was falling seemed to be a rational trading strategy in the circumstances and was profitable to boot.
We now have the opposite: a stimulatory monetary policy with negative interest rates and high money supply. Little wonder the gold price is rising in response. In addition, investors are being paid to be long (negative interest rates create a positive carry for holding gold) while the gold price is rising. Note that, although negative interest rates which create a positive carry for holding gold are not accessible to everyone, many central banks are buying gold to diversify their foreign exchange reserves.
Being long of gold seems to be a similarly rational trading strategy under the current circumstances.
However gold’s correlation with nominal bond yields is low. Now at a 10-year high, gold’s correlation with the price of US 10-yr yields is still only almost 20%.
Correlation: Gold & US 10yr bonds
The current interpretation of the gold price, as articulated in a PIMCO Viewpoint of January 2014 and more recently in an article on 10-year Paradigm Shifts by Ray Dalio of Bridgewater is that the gold price is strongly influenced by real yields. More specifically, the gold price in US $ is driven by US $ real yields.
Gold price vs real bond yields
Source: Bloomberg & PIMCO data
However we should not fool ourselves: no-one knew then, no-one knows now, and no-one can predict tomorrow. Not the English Channel weather and not the market price of anything. While statistically the best guide to tomorrow’s price is today’s price action, the best that we can do is offer our version of why we believe that yesterday played out the way it did.
We must therefore recognise our own fallibility and our biases – and those of others. The only thing that we, as investors, can control is our own behaviour – neither the behaviour of others nor prices. In managing other peoples’ money we must therefore:
- exercise prudent risk management;
- implement appropriate risk budgeting and position sizing for our portfolios, and;
- have the discipline to execute sell-stops and the fortitude to exercise buy-stops when they are triggered.
Rudyard Kipling again:
“If you can keep your head when all about you are losing theirs and blaming it on you,
“If you can meet with Triumph and Disaster and treat those two impostors just the same;
“Yours is the Earth and everything that’s in it, and—which is more—you’ll be a Man, my son!”
If you can keep your head (have the discipline to consistently keep to your investment process),
If you can meet Triumph and Disaster (profits and losses) and treat those two imposters just the same (consistently implement both the buy stops and sell stops), then yours is the Earth (investment performance) and everything that’s in it (assets under management).
I leave it to the reader to decide on the relative merits of masculinity or femininity.
Download: Weekly Comment, Andy Pfaff – 09122019
The content of this article is for information purposes only and does not constitute an offer or invitation to any person. The opinions expressed are subject to change and are not to be interpreted as investment advice. You should consult an adviser who will be able to provide appropriate advice that is based on your specific needs and circumstances. The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable and given in good faith, but no representation is made as to their accuracy, completeness or correctness.