Position Sizing: Key to Maximizing Returns

In a time when market volatility and equity preservation is of utmost importance, determining the correct number of shares to buy, or “position sizing”, is key to maximizing returns and minimizing risk.

The common investor generally doesn’t spend much time thinking about how many shares to buy or how significant of a position to take.  Instead, most investors use a common methodology of trading the same number of shares each time, which usually translates to a specific dollar amount.  Other, more sophisticated investors, opt to allocate a certain percentage of their portfolio value to a specific position. Following this train of thought, a new position in a portfolio of $100,000 would transcribe either a $10,000, or 10%, investment or a usual position of 50 shares.

Although these methods may work for some, using the volatility of a specific portfolio is likely to be the most effective decision tool.  Measuring a portfolio’s overall volatility enables an investor to decide on what percentage of that portfolio he is willing to risk losing on the new position.  This methodology is better explained through the following example.

Gold Goes Parabolic on U.S. Downgrade

Earlier this year at the end of April, silver and it’s exchange traded funds iShares Silver Trust (SLV) began to launch their booster rockets and go “parabolic” trader parlance for a vertical move upwards. The relative strength index (RSI) during that period peaked around 89. Silver hit all time highs of $50, and created a topping tail or reverse hammer, a very bearish indicator and then swan dived 20%.

GLD - Gold ETF

The fundamentals behind gold’s price action are different but in some ways the same.  Gold has been in a strong uptrend for well over a year now. The reasons for this continuously positive trend are varied, a weakening dollar, fear in the markets etc. New language has entered the lexicon of investors, credit default and debt rating downgrade. These two hugely bearish terms have become catalysts for much fear and panic in the equity markets. The results of which are extremely volatile down days that have erased all of the gains of 2011.

When in fear, people run to the exits (as many have) or they run to safe havens, such as gold.

Gold Speculators Lead Yellow Metal to New Highs, Gold and Silver Miners Surge

by Raghu Gullapalli, SmartStops writer  – originally posted at Minyanville

This past weekend I was watching Wall Street 2 on HBO. During the course of one of his monologues Gordon Gekko, played by Michael Douglas said, “Bulls make money, Bears make money and Pigs get slaughtered.”

 Did Gekko spell pigs P-I-I-G-S?

 Over the past several months the world markets have closely watched the soap opera regarding European debt play out. Perhaps we have mistakenly fixated on the Greek and Portuguese characters when we should have focused on the 800-pound gorilla, Italy.

 One group of people who did have their eyes on developments in Italy were Safe Haven investors, i.e., gold speculators. Physical gold and its exchange-traded funds had a strong surge, pushing gold above an important resistance level at $1,550

 This group of investors led gold to new Euro/gold highs (something I mentioned previously in Silver Is A Value Buy). This was all before Tuesday’s news of the downgrade of Ireland and the possibility of another round of quantitative easing by the Fed. Thats when the whole world started piling in.

 Gold surged again, seeking out the all time highs of $1,577.40 and falling just  $10 short.

Gold chart - GLD

 SPDR Gold Shares (GLD) saw a similar surge, which may well continue in the days to come, as the market begins to price in the Irish default and a possible QE3. The ETF is forming a short-term bull flag and holding well above the 210 day moving average. But with rapid price spikes come rapid declines, SmartStops has the short-term and long-term stops for GLD at $147.52 and $142.55. It is very likely GLD will take out the all time highs of $153.61

Gold chart - GLD

 

Gold chart from Smartstops - GLD

A surprise development from Tuesday’s news was the revival of the gold and silver miners. For several weeks, during the commodity sell off which was sparked by increased margin requirements for precious metals, the miners were in decline and then range bound. Silver Wheaton (SLW) was trading below its 210 day moving average a fairly bearish indicator, as was the Market Vectors Gold Miners ETF (GDX). But on Tuesday that pattern may have changed. If SLW continues to rise it may keep going till the next resistance point at $42. SmartStops has the short-term and long-terms stops for SLW at $33.16 and $29.94.

Silver chart - SLV

Silver Chart from SmartStops - SLV

I’m less confident about GDX as it still below the 210 moving average but a few component stocks of the ETF, Goldcorp (GG) and Barrick Gold (ABX), saw impressive runs on Tuesday.

Gold and Silver Part Ways?

By Raghu Gullapalli, contributing writer

GLD SLV

 Just this morning an absolutely abysmal jobs report was released. This latest news on top of the steady stream of poor economic reports over the past week will no doubt conspire to push the market down. The S&P 500 is down to 1,300 levels and may well seek out the long-term support at 1,250. And on top of all this domestic turbulence, lies the desperate situation in the Eurozone and their dealings with the PIIGS; Portugal, Ireland, Italy, Greece and Spain.

 Economists of all stripes are talking about a double dip recession and under those circumstances you would think there would be a flight to the security of precious metals. While recent increases in margin requirements may reduced the fervor for such investments than in recent months, it will not completely dampen the enthusiasm of many for Exchange Traded Funds (ETF) that can be erstwhile proxies. After all in the midst of all this new terrible news, what is the dollar doing? Tanking!

Much of the speculation has been shaken out of the Silver trade, especially after the dramatic 30% pullback from its all time highs in the first two weeks of May. Despite these more reasonable prices, and its recent range bound state, there has been little or no appetite for Silver.  iShares Silver Trust (SLV) is continuing to trade below its 55 day moving average but comfortably above the 210 day moving average.  Smartstops has the short-term stop at $33.09  and the long-term stop at $32.58

 

In contrast to Silver, Gold has not altered the direction of its movement significantly on the long-term chart. If you look at the SPDR Gold Trust (GLD), five-year chart, the price of the ETF is in a strong upward channel and despite the volatility in early May looks to continue its longer-term trajectory. This supports the opinions of many analysts and Gold bulls that project $1,600 Gold by the end of 2011 and may even lend credibility to the idea of $2,000 gold. Smartstops has the stop price of GLD at $146.84   

How Investors Can Profit From Rising Platinum Prices

by Tony Daltorio, contributing writer

Even after a sharp sell-off on commodities prices, the spot price of platinum remains within reach of a two-year high. That high was hit last month at around $1,870 per ounce.

The consensus in the industry is for higher prices in the coming years. And this is despite the disaster in Japan, whose automotive industry is one of the biggest consumers of the precious metal.

Why so much bullishness?

 The main reason investors, analysts and those in the industry point to is the challenges facing South Africa’s platinum mining companies. South Africa is the world’s biggest producer of the metal. It produced 4.6 million of the 6 million ounces mined in 2010.

 Problems in South Africa

 Some metals have seen a spectacular appreciation in dollar terms. For instance, palladium has quadrupled from its lows in late 2008.

 However, the prices South African miners receive are not keeping pace with costs.

 A basket of platinum, palladium and rhodium weighted for the level of the average South African miner’s production has risen just 4 percent in rand terms in the past 12 months. This is according to Walter de Wet, head of commodities research at Standard Bank.

 That compares with cost rises of 8-9 percent in wages, 25 percent in electricity and 18 percent in fuel.

 Because the mining companies pay costs in a strong currency but take payments in a weak currency, the rand’s strength against the dollar erodes earnings.

 The rapid increase in costs means prices are unlikely to fall far from current levels, most analysts believe.

And let’s imagine the scenario where platinum prices stay steady or even fall. It won’t be a pretty picture. Leon Esterhuizen, mining analyst at RBC Capital Markets, puts it this way: “If we get sideways prices for even a year you will see [mine] shutdowns.” He added that the big platinum producers are “running out of [profit] margin”.

 Supply Constraints

 Johnson Matthey, in its annual report, also stated that platinum prices would not fall far from current levels of $1,765 per ounce.

 Its annual report estimates a net surplus of just 20,000 ounces of platinum at the end of 2010. This is down from a surplus of 635,000 ounces the prior year. The drawdown was due to last year’s recovery in car manufacturing.

 But even if the price of the metal does rise, do not expect the normal supply side response.

 Due to the geological freak of nature, most platinum production will continue to come from South Africa and Zimbabwe. Although it should be mentioned that production is increasing in both Russia and North America.

 With the notorious power shortages in South Africa, the mining companies simply do not have enough reliable electricity to expand production at their mines. This in itself will support platinum prices.

 Platinum Investments

 For investors looking to profit from rising platinum prices, perhaps the best way is through the use of exchange traded funds. One such ETF is backed by actual physical platinum. It is the ETFS Physical Platinum Shares (NYSE: PPLT).

 If one does purchase PPLT, an investor should keep in mind the well-known volatility of precious metals day-to-day prices  If one does purchase PPLT, an investor should keep in mind the well-known volatility of precious metals day-to-day prices. Make sure to properly manage your risk via position sizing.  A free calculator is available at SmartStops.net.. It’s the way all intelligent investors should manage risk in our 21st century markets.  . 

 as posted at:  http://www.minyanville.com/businessmarkets/articles/platinum-commodities-prices-commodity-prices-precious/5/31/2011/id/34862

 

 

The Bubble has Popped, Now What?

by Raghu Gullapani,  SmartStops.net contributing editor

  SLV, GLD, USO, DBC

A rare halt in oil trading Wednesday triggered a sharp sell off in commodities and equities, in markets afraid of an encore of last week’s commodity plunge. The last halt in oil trading occurred in September 2008, a week after the collapse of Lehman Brothers.

Silver lost 9% in the sell off, erasing gains in the previous couple days and is down another 6% in the pre market (as of when this was written). It has yet to find a bottom or to a paraphrase Bob Barker, of the Price is Right, “Down, down it goes, where it stops no one knows.” Now with the increased margin requirements driving a number of speculators out of the market, the precious metal may seek out price levels more in keeping with historical norms. Those prices are calculated by seeing how many ounces of silver are needed to buy an ounce of gold. Over the past ten years the ratio has been roughly 60:1. If silver were to return to a similar ratio, it could go down as far as $25 an ounce. iShares Silver Trust (SLV) the proxy we use in lieu of silver at Smartstops.net has the short-term stop at $31.97 and the long-term stop at $29.37

It that wasn’t enough to make you reconsider being long commodities, Powershares DB Commodity Index Tracking ETF (DBC) has formed a Head and Shoulders. A pattern associated with a change in trend direction. The neckline/support of the pattern, coincides with the Smartstops.net short-term stop at $28.16 and the long-term stop is $27.30

 

 

Is It Too Late to Buy Gold?

By Raghav Gullapani, Contributing Writer

GLD, SLV, GDX, GDXJ, ABX, GG. SLW

This is a question that everyone asks me as soon as they find out I’m a trader.  Of course the question comes in many forms…

Have I missed the move?

Is it too expensive now?

In fact even my Mother asked me that question just this past weekend. And my Mother-in law asks, should we sell?

My answer to all those people is the same. 

A New ETF To Play Gold’s Appeal

As the appeal for commodities, in particularly, gold continues to rise, ETF provider, ETF Securities recently announced another first-to-market ETF, the ETFS Physical Asian Gold Shares (AGOL).

AGOL is the first U.S. precious metals product to be vaulted in Asia as its custody will store all of its physical gold bars in secure London Bullion Market Association approved vaults in Singapore, as stated in its prospectus.  From an investment perspective, the objective of AGOL is to reflect the price performance of reflect the price performance of physical gold, less trust expenses, while carrying an expense ratio of 0.39%. 

4 Reasons Gold ETFs Are Expected To Keep Luster

As gold continues to oscillate ahead and below the $1,400 per ounce mark, some suggest that the precious metal could be in a bubble, but there are four reasons the metal is likely to sustain its price levels in the near future.

First, gold continues to be the ultimate safe haven in times of uncertainty.  The US economy is showing signs of recovery, but at a slow and steady pace.  The most recent data that illustrates this is a report by the Labor Department which indicated that US employers added fewer than expected jobs last month and payroll counts increased by 103,000 last week as opposed to the 150,000 expected by analysts.  To put it into perspective, these numbers resulted in Federal Reserve Chairman, Ben Bernanke to state that it would take “four to five more years” for the labor markets to completely heal.

9 ETFs To Play Currency Debasement

As developing nations continue to implement loose monetary policies, keep interest rates low and boost money supply, a nation’s debt and currency debasement should me of much concern. 

Most recently, a study indicated that the U.S. national debt has ballooned nearly 12 fold over the last 30 years.  Additionally, over this same time span the ratio of debt to GDP has gone from nearly one-third to 85%.  During this time of exploded debt, GDP has only expanded 5.3 times, indicating that debt is growing at twice as fast as the U.S. economy.  Similar trends have been seen in Europe, in particularly Greece, Spain and Portugal.

Some concerns of this exponential growth in debt include hyperinflation, as a result of printing more currency, a decline in the value of a nation’s currency, better known as currency debasement, and increased costs of borrowing, which make it difficult to chip away at deficits.