Friday, September 24, 2010

George Gero Learns Value of Gold As Lad During World War II

-As a lad, George Gero found out first-hand that gold really is an asset that retains value in the worst of times. It enabled his family to escape the Nazis during World War II.

The metal has been an important part of his life since, as he spent a career trading spreads – such as one gold futures contract versus another, or gold versus silver and platinum – looking to capture small gains but with a lower-risk set-up than outright futures positions.

Gero, currently vice president and precious-metals strategist with RBC Capital Markets Global Futures in New York, recalls he was maybe 8 years old and living in Hungary near the end of World War II. Gero was Jewish and had been born in England, thus was considered an enemy of the state by Germany’s Hitler government. His mother had already been a German prisoner once, before his father—working as a banker in Portugal--paid a ransom for her release. His mother was later at risk of being sent to a Nazi prison camp again, along with Gero and his sister, when his father made arrangements for their escape.

The plan worked, thanks to gold. The family bribed German guards into letting them cross the border out of Hungary, using some Swiss gold coins and gold wafers. They also had enough gold to pay for a car and driver to take them to Switzerland, before they later reached Portugal.

Gold is often thought of as a store of value in times of economic and geopolitical turmoil, and German-occupied Europe was certainly in a crisis during the latter stages of World War II. “That was really the only medium of exchange that people trusted back then,” Gero said.

Thus, he said, “gold kind of saved my life. We were able to get out of Hungary because of gold.”

Gero later became a U.S. citizen and figures it was “more than a coincidence” he eventually became a precious-metals trader. “When I started work on Wall Street, I always had an interest,” he said. He became a member of the New York Mercantile Exchange in 1966 and was a platinum trader. Gero later joined COMEX and traded the first gold contract when it was launched in December 1974, after the U.S. government made it legal for citizens to own gold.

He is immediate past president of the International Precious Metals Institute and a member of the Comex board of directors. He wrote a book called “Precious Metals” in 1984.

Gero Specializes In Trading Spreads, Gold Versus Silver And Platinum

Gero’s forte is trading spreads. He might buy gold futures in one contract month and immediately sell in another, trying to benefit from the price differential between the two. For instance, suppose a trader bought December gold and sold the February at a price that was $2 higher. He would hope for the spread to either remain the same or for December gold to rise more than the February.

Gero would also take positions on whether gold would outperform or underperform platinum or silver. To profit from a bet that gold would increase by the most, a trader would buy gold and sell platinum or silver in equal dollar amounts.

By holding offsetting positions in two contracts, a trader limits risk since he does not have to rely only on guessing which way the broad market will go. He simply posts a profit if he correctly bets which will do better than the other – whether both are rising or falling.

“You don’t get very rich doing that,” Gero said. “That’s not what hedge funds like to do. But…you can consistently eke out returns without having undue risk.”

Gero relies upon a combination of fundamental factors--such as news and supply/demand issues--and technical-chart indicators when making his trading decisions.

To trade precious metals, he monitors the world’s major currencies, along with trends in interest rates, political events and economic data for both the U.S. and Europe. He also closely monitors open interest (the number of open positions) in the metals, volume, moving averages, and whether a market is posting a series of higher or lower closes.

If Gero sees volatile swings in prices, but no meaningful change in open positions, he takes this a sign that the same people are exiting and entering positions. But say he sees the number of open positions rising as prices climb, then he knows there are new buyers adding to a market’s momentum, which he considers bullish. Conversely, declining prices at a time of rising open interest would leave him bearish, since it indicates fresh selling. Meanwhile, a move either way on declining open interest means traders are simply exiting prior transactions rather than making new ones.

“And I look at charts points to try and think about where institutions would enter the market either on the buy side or the sell side,” he said.

Gero shared what he considered a mistake early in his career, to help others avoid doing the same. When news reports emerged that Egyptian President Anwar El Sadat had been assassinated in October 1981, gold prices started rising. The metal is often bought as a safety play at a time of geo-political tensions. However, Egyptian authorities soon denied initial reports of the assassination, Gero recalled.

“I sold gold,” Gero said. “Then of course we found out that there was an assassination, and I was forced to buy back the next day (to offset a position) at a much higher price, taking a big loss.”

The lesson: be careful about rushing into a trade on a “knee-jerk” reaction to a headline, especially on stories from a single source.

“Wait until you can analyze the story,” Gero said. “Each situation is kind of different.”

Otherwise, Gero’s advice for budding traders is to practice their trading strategies on charts ahead of time to make sure they appear successful when none of their money is actually on the line. He also advocated reading as many financial-news publications as possible, particularly anything related to a commodity in which somebody wants to take a position.

“Before you trade, study the markets and make a bunch of paper trades without committing money,” Gero said. “See if you can consistently get the right direction in your trades.”

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