On the flip side, Goldman Sachs recently forecasted that gold would fall to new lows on the back of a fresh acceleration in the U.S. economy in 2014. There is certainly a case for this to occur if the Fed gives the market what it needs and we see a liftoff in stock prices. This scenario would likely negate the safety trade in gold and lure risk takers back into stocks and other high yield securities.
In addition, we have continued to see unabated asset outflows from gold-related ETFs in 2013. According to Index Universe, GLD still tops the list of total redemptions with over $20 billion in outflows this year and has lost over $400 million in September alone. Clearly this is a sign that investors have used the most recent bounce to continue exiting their gold holdings.
How To Play Gold Right Now
While there are definitive arguments for and against owning GLD at this juncture, I am in favor of looking at it from a risk to reward standpoint. If you currently own this ETF, then I would continue to maintain the position with a conservative stop loss to limit your downside risk. That way you won’t get heavily burned if the Fed statement sends this fund sliding back down to the lows. Remember to size your position in line with your risk tolerance and not to get too overly allocated to this sector which is a mistake that I often see made by overly enthusiastic precious metals investors (i.e. gold bugs).
If you don’t have a position in GLD but are considering making an allocation, I would wait until we get more clarity in the coming days and the price trend makes a turnaround. I don’t think that there is a definitive edge to jumping into this ETF ahead of a known event that could send it careening in either direction. Keep some dry powder on hand if we start to see renewed strength emerge and start with small positions as you make your way into this sector. Without a doubt there will be continued volatility in the coming days and you may be able to use that to your advantage as you work into new holdings.
David Fabian is the chief operating officer at Fabian Capital Management LLC.
