Gold and Gold Stock Mutual Funds: Do you include gold stock mutual funds in any of your managed account programs? I get asked about this every so often and have discussed it in prior issues of this newsletter. The answer has been and still is no, but now there is a new instrument that will enable me to manage gold as a holding in client accounts, particularly those in Tactical Asset Allocation (TAA).
Before I get into that, I will review why I have not traded gold stock mutual funds. In short, they have been quite volatile and I have not found what I think is a good way to handle them. That does not mean that I believe they should not be part of one's portfolio. My personal accounts have a target of 5-10% in gold stock mutual funds. The only time I buy or sell them in those accounts is when rebalancing is called for because the percentage is outside those limits.
I have seen several mechanical trading models for gold that appear to be worthwhile. The problem is that gold and gold stocks are not the same thing. The stocks tend to be more volatile than the metal. One reason is that small changes in the price of gold can have a large effect on the profitability of some gold producers. If the price of gold is close to a company’s cost of production, a fairly small increase in gold can result in a large jump in profits, which is likely to be reflected in the price of the stock. Similar, but opposite, effects can result if the metal's price drops.
Another factor is that traders in gold stocks try to anticipate the direction of the price of gold. To the extent they are successful the stocks can make major moves before gold does. I have not been able to find a model for gold price trends that has tested as effective for trading the mutual funds.
Of course, one possibility would have been to trade gold directly. Buying and selling the metal itself or even coins that contain it is not practical. There are storage and insurance costs in addition to the spread between the buying and selling prices that works to the dealer’s advantage and the trader's disadvantage.
The practical alternative is trading gold futures. I could do that in my personal accounts but did not want to take time away from researching techniques for trading stocks mutual funds that can be used in client accounts. Unless I wanted to become registered as a Commodities Trading Advisor (and I don't), I am not allowed to trade futures in client accounts.
Last November a new instrument began trading that I can use for client accounts. It is the exchanged traded fund (ETF) called streetTRACKS Gold Shares with ticker symbol GLD. Each share represents one tenth of an ounce of gold. They are traded like a stock through any brokerage account such as the ones most clients have with Fidelity Institutional. The expense ratio of the ETF is quite low since minimal management is required, but there are the normal commissions and bid-asked spreads for stocks whenever shares are purchased or sold. If your account is with Fidelity and you are interested in adding gold to your holdings, please get in touch with me for details and more information.