Gold and Real Estate models: You have written about models for trading gold stock funds and real estate funds. How are they doing? I’ll start with the not so good news about a trade in the Fidelity Real Estate Investment fund (FRESX) last October. It lost 6.4% including the 0.75% short-term selling charge. The model had been negative since last March, but it picked up on a reversal in that fund, which did not last. Trend following models are subject to short losing trades when the trend reverses fairly quickly. On the plus side, the model has kept us out of that fund as it has dropped much lower since we sold it.
The model is based on FRESX because I had the longest history for it. However, the model should work well with any fund, such as Vanguard’s, that is highly correlated. Doing business at brokersXpress makes trading non-Fidelity funds feasible. Vanguard’s, in particular, does not have a short-term trading charge, so it or one from another company likely will be a better choice for future trades.
Now the very good news: the gold fund model gave a buy signal May of 2006 that is still in effect. Long lasting buy signals generate substantial profits. At the end of last year, the trade in Rydex Precious Metals was up over 30%, and the fund continued to rise in January with the trade close to a 50% gain at one point.
The gold stock model, unlike the real-estate one, is not a trend following one. It is based on the relationship between gold stock prices and the price of the metal. When stocks are priced low relative to gold, it indicates pessimism about them, so at extreme levels it is a good time to buy them. When the stocks are priced high in relation to the gold price, the opposite is true. As things currently stand, a sell signal is not likely soon.
Gold stocks are more volatile than the metal since company profits can increase sharply when the metal sells for more than the cost of producing it, and vice-versa. My research shows it is much better to buy a gold stock fund when the model is positive than it is to own the metal or an ETF that tracks it.
We originally bought Rydex Precious Metals on 5/22/06, and it quickly fell by almost 15% in the next three weeks. That type of volatility is the main reason I recommend limiting one’s (initial) exposure to gold funds (and also real estate funds although they are not quite as volatile) to 20-25% of the portfolio.