Gold : Cuts Both Ways

• Running a sizable long Gold position (first initiated on 11Mar10), 9% EAR. Have separated it from rest of Core Book in risk calculations thus far given confusion as to its Risk On/Off behavior. However, large size of position dictates that this is no longer sensible. Exercise here to incorporate it into rest of book.
• Gold = Risk Off (= Current behavior). Observe last night's price action relative to US equities. When US stocks were rallying for most of yesterday (S&P high 1077), Gold was being sold off (low 1222). At the end of the day, when equities gave up all of their gains and turned negative, Gold rallied.
• Gold = Risk On (= Once bitten twice shy). Recall the nightmare period for me from around 13-21May10 [see the 2 red rectangles on the chart] when I was running Risk On=+CAD vs Risk Off=+Gold. During this time, equities sold off to a new post 06May10 low and Gold sold off equally dramatically, thus completely screwing me up. The usual explanation for this behavior is wholesale panic liquidation of Risks/margin calls. Gold gets sold when people need liquidity in a hurry.
• Therefore, true exposure of Core Book now : EAR when Gold is Risk Off = [20.8% Risk Off];  EAR when Gold is Risk On =[2.8% Risk Off]. A bit large, the gap between the 2, but the real question is whether I want to be running a 20.8% EAR Risk Off book. Might need to reduce the long Gold position to something more manageable. Had actually made things "worse" by adding onto Aug Gold at 1225 last night. The upside is - if we get another bout of panic liquidation, I am still positioned Risk Off even with the Gold about face.