Gold: What price is my “pain threshold?”

That was the question my friend and Kitco Editor Neils Christensen presented me with on the phone last Wednesday after some readers considered my $2500 call a bit “too optimistic”. Well that is a fair call out, considering that not only has gold drastically under performed, but also that the stock market is the most hated rally on Wall Street with the S&P up 40.5% over the past 50 trading sessions. What’s more, we have interest rates near zero, a coronavirus shutdown that destroyed our economy, disastrous fiscal and monetary policies, escalating bankruptcies and so many unemployed that every Thursday when the initial claims number is released I cringe and hope this is all just a bad dream. Any rational investor would think gold should be up 40.5% over the past 50 trading sessions putting it somewhere close to $2200/oz but that doesn’t appear to be the case.

So how much gold should I own and at what price should I tap out?

The answer to the first part of this question brings me back to 2002 when I was a Financial Consultant for the now defunct A.G.Edwards, where they had me take a course from the College for Financial Planning called the Accredited Asset Management Specialist program. Within that course we read a study from 1986 called “The Brinson Study”, which was a major landmark in the debate over how money should be managed. They reported the results of a 10-year period of 91 large pension funds and sought to explain the differences between the performance in terms of their investment practices. They looked at 3 different categories: security selection, market timing and asset allocation policy. The data indicated that asset allocation policy was the overwhelming dominant contributor to total return.

Only you know how your asset allocation is distributed throughout your investment portfolio of various categories: equities, bonds, real estate, foreign securities, precious metals, ETFs and miners. Hopefully you're not in some double leveraged junior miner ETF, like JNUG, that gets crushed when volatility strikes due to re-balancing leverage and becomes illiquid past the close while shutting off from trading in the early evening while gold is moving 24 hours a day.

So back to the question, how much gold should I own?

The CME offers different investment options, such as E-micro (10 oz.), E-mini (50 oz.), and full (100 oz.) contracts which gives you flexibility, liquidity and the choice of tailoring your own risk management strategy. Each contract has an initial margin requirement to establish a position and a maintenance margin to hold the position.

For every dollar fluctuation in gold futures, your account will move the corresponding amount to the contract, so if gold moves from $1675/oz. to $1676/oz. and you own the 50 oz. contract your futures account would go up $50 or down $50 in the case the market fell to $1674/oz. To figure out how much gold you are controlling per contract you take the price of gold and multiply it by the size of the contract 10, 50 or 100 oz. If gold is trading at $1675/oz. and you bought the 10 oz. contract you are controlling $16,750 worth of gold after initial margin is posted. Based on your initial deposit you can control the leverage, for example if you put $8,375 in an account and buy a 10 oz contract at $1675/oz. you are using 50% leverage but since the exchange initial margin is $1,006 an investor could leverage as much as 93%, although not recommended. The point is you can easily control the amount of gold you see fit in your allocation policy.

Now let us tackle the second part of the question, what price should you tap out?

This would be the projected chart pattern we would need to see in order to achieve $2500/oz. by Dec 2021. In comparison to the 2008 crisis, this is a more rapid deterioration of the economy in conjunction with the substantially more aggressive fiscal and monetary policy. Therefore, I believe the slope of the upward line will be slightly more linear. With greater linearity, comes greater volatility and in my previous article I stated that stock market euphoria from the “reopening process” should put pressure on gold, but that I didn’t think it would occur until the 3rd quarter. Based on this morning’s blowout jobs number it might be starting a bit sooner than expected. This is where a sophisticated investor would use short term corrections like this to add to their current asset allocation policy in preparation for the intermediate to longer term trend to continue.

How one would determine the price level that he or she would sell out of gold is more based on the specific trading guidelines they set for themselves (day, swing or long term position trader), economic investment policy (is the Fed increasing or decreasing interest rates), investment vehicle policy (use of leverage or not), and specific trading vehicle to use (physical, futures, miners, ETFs). I strongly believe that physical is the best followed by deliverable futures. Miners fall into another category of a hybrid blend of company risk along with commodity price risk where one can benefit in different ways. Lastly, I am not a fan of ETFs. How is GLD $158/share when futures are $1675/oz? What you are getting for $158/share - I don’t even know, but what I am sure of is if you read the 37-page prospectus you will be as confused as I am.

So how much gold should I own and at what price should I tap out? Well the answer is that gold is not a one size fits all cookie cutter investment and I would be very skeptical of anyone who presents it that way.

Good luck and good trading, Phillip Streible Chief Market Strategist 312-858-7303 Follow us on Twitter:@BlueLineFutures Follow us on Facebook: Blue Line Futures Facebook page Subscribe to our YouTube channel: Blue Line Futures YouTube channel

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