Michael Batnick of the Irrelevant Investor blog readily admits that, when it comes to gold, he’s been “a pretty vocal critic of the barbarous relic.”
So why is he all of a sudden about to devote 10% of his liquid net worth to the “safe haven” investment he’s historically spurned?
The answer lies in this chart:
Batnick points out that the SPDR Gold Shares exchange-traded fund GLD, -0.22% is about to close above its 12-month moving average for the second-straight month. The chart shows what happens when an investor buys gold the moment it breaks above its 12-month average and goes to cash when it moves below (the yellow “trend” line) vs. what happens with the buy-and-hold approach (the black line).
Batnick made clear that “prior to GLD, this could only have been done with futures contracts, or gold bullion, with the former adding a degree of leverage that I would not have been comfortable with, and the latter adding a degree of paranoia that also would have made me uncomfortable.”
Clearly, following that trend dwarfs just buying and holding, at least historically.
“I like to say that the worst 10-year period for any backtest is the next 10 years, but I think that this simple trend-following rule should continue to be effective in the future,” he wrote. “The reason why trend following works with gold is because gold doesn’t trade on fundamentals, it trades on sentiment and emotion.”
He used this cartoon to capture that sentiment and emotion:
Reference Article: http://www.marketwatch.com/story/one-look-at-this-chart-and-even-the-haters-might-be-tempted-to-buy-some-gold-2017-08-28