Yesterday we showed how the price of gold has gone hyperbolic. Given the rise, we thought it would be useful to touch base with some of Covestor’s model managers who run portfolios whohold the SPDR Gold Trust ETF (NYSE: GLD), the world’s largest gold ETF. One such manager is Bill DeShurko who runs Covestor’s Equity Opportunity model. We asked Bill for his thoughts on gold as it marches higher and what events might cause him to exit the position. His answer:
For a lot of people, gold, via GLD, is used as a hedge against other investments. In my Core equity portfolio it is held mainly for its appreciation potential, although serving as a potential hedge is comforting.
Fundamentally, I don’t see how gold has topped out. When looking back at the last run for gold in the 1970’s, gold continued up as long as there was a perception that interest rates would continue to rise. At this point I think the worry over rising interest rates and inflation still has a way to go. I’d add that the longer we go without rising interest rates, the higher and more rapid the rise will likely be. Especially since we’re seeing a significant rise in inflation now, without a move in interest rates. There is certainly an argument for the bond bubble breaking.
I look at the charts on our investments to assist with sell decisions. GLD has been in a trading range since mid-September of 2010. It just recently broke out on the upside by a buck or so. I wouldn’t bet the ranch on a new rally yet, but at some point securities do break out from trading ranges.
Since we haven’t seen an increase yet in Fed policy, I think this could be a permanent upside breakout. I still expect a big rally in GLD. Big as in “a good move in a very short time period,” as I’ll probably try and exit during the next rally, hopefully THE big one, and not hold out for the “top”. At least that is the game plan.
The risk here is that any increase in interest rates is seen as a recovery killer, and thus deflationary. This could cause a pretty nasty selloff in GLD. So while I’m hoping to ride GLD up, I’ll put a pretty tight stop loss in place if we start seeing any indications of real economic decline, especially in the manufacturing and industrial production numbers.
Here’s how GLD has performed over the past year, via Google Finance:
