This May Be The Saddest Gold Fund Investor Letter We’ve Ever Seen

gold handcuffs

Gold, gold miners, everything gold is in the dumps, and unfortunately for some money managers, the onus is on them to explain why they went all in on the commodity, and why it’s performing so horribly.

Their investors still need to get that periodic letter.

Business Insider obtained a copy of one such letter dated June 30th, 2013. The money manager’s fund, a Florida-based “long/short value” fund focused on equities and commodities, lost 68.45% in Q2 2013.

The letter notes that the fund’s net exposure is “fully invested in gold stocks.”

From the letter:

Here is the problem. The oldest daily gold stock index started in December 1983. If you look at the older, weekly gold stock data, which starts in December 1938, there were plenty of instances when the 1-month RSI readings went lower than February 20 and gold stocks continued to go lower.

While one may think that 29 years would produce enough data to make for a robust indicator, the problem is commodities have 30 year cycles. The last major commodity top was in 1980. So the 1983 data does not even cover a full commodity cycle. While this seems obvious in retrospect, it did not become glaring obvious that something was amiss until the precious metals complex crashed in mid-April.

The daily 1983 data was downgraded and the more stress-tested 1938 data was analysed more thoroughly. At the April 17 low, even the 1938 data was indicating gold stocks were roughly in the 0.9% percentile with respect to being oversold. So it seemed like a good idea to buy even more. Well, by the end of June, gold stocks were in the 0.1% oversold percentile.

In summary, there were many indicators based on 1983 data in February, March and early April that were at all-time extremes. This made the risk look negligible. However, the 1938 data does not give up “all-time” extremes so easily. The next time around the oldest available data will be utilized. So this particular problem should be rectified Ianthe future. We are now at the point where every time gold stocks were this oversold (yes since 1938), the downside risk was quite minimal. The upside potential from here will not be mentioned. The numbers are so high that doing so would strain credibility.

Incomplete data set… whaddyagonnado?

The fund remains committed to maximizing annualized return, so chins up.