Portfolio Manager Perspectives

Jeff Benjamin

Porter on gold: Too late to buy, too soon to sell

Trend-spotting manager Jim Porter still sees rally continuing, but warns “the exit door can get crowded in a hurry”

Oct 6, 2010 @ 11:10 am

By Jeff Benjamin

It may too late to jump on the gold bandwagon, but it’s also too early to bail out of the precious metal, according to Jim Porter, manager of the Aston/New Century Absolute Return Fund Ticker:(ANENX).

“The [gold] trend is solidly in place,” said Mr. Porter, founder of New Century Capital Management LLC. “But the problem is, the length and extent of the move means there will be some profit takers, and if there aren’t any more buyers the exit door can get crowded in a hurry.”

As a trend-following quantitative manager, Mr. Porter invests primarily in exchange-traded funds. He has moved in and out of gold three times this year through the SPDR Gold Shares ETF Ticker:(GLD).

He has been participating in the current gold rally since August. As of this week, the ETF has gained nearly 12% and the price of gold has climbed to around $1,300 an ounce.

“I don’t think there’s been a stronger trend anywhere than what we’re seeing with gold, and trends like this you don’t see very often,” said Mr. Porter.

Through Tuesday’s close, the gold ETF had gained 22% from the start of the year. That compares with a 4% gain by the S&P 500 over the same period.

One of the reasons Mr. Porter is jittery about his allocation to gold is that there are multiple forces driving the rally, and not all of them are easily analyzed from a quantitative perspective.

“Buyers of gold are not the same as buyers of other metals like copper and aluminum,” he said. “There are gold collectors and there are bears around the world that will move to gold when there’s fear.”

In a lot of rallies, he said, the end is preceded by a flood of retail-investor money, which gets in too late to participate in the run-up.

“We’re looking for the emotions of fear and greed, and right now my feeling is there are still more buyers who want to get in on the trend,” he said. “I find it baffling that at new highs people are still buying gold.”

He added, “We are holding our positions because we haven’t seen any weakening in this rally.”

Mr. Porter caps his gold exposure to 3% of his portfolio, and is now paying close attention to any activity that suggests the market is starting to short gold.

“We’re at levels now where we have to start thinking about when we’re going to sell,” he said. “And if someone’s getting in now, my impression is it’s a little late to the game, but that doesn’t mean they can still make a profit.”

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives.

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