From the May 01, 2010 issue of Futures Magazine • Subscribe!

George Gero's golden years

When former Federal Reserve Board Chairman Paul Volcker called George Gero a gold bug in response to a question George asked regarding gold a year ago at a CME Group conference, Gero wasn’t insulted, because, as he puts it, “gold saved my life.”

Gero, who is Jewish and was a British citizen (although he is Hungarian) living in Hungary during World War II, found sanctuary from the Nazis at a Jesuit school, while his sister hid at a convent. His family's gold holdings secured their safety and eventually allowed them to escape Hungary. “My father was a banker in Portugal and we always had a major interest in gold,” Gero says.

After the war, his family was reunited and moved to New York. Given his early trials, it is quite fitting that Gero, who is now vice president of Global Futures for RBC Capital Markets, would spend most of his adult life trading and analyzing gold.

Gero took a job with commodity brokerage Goodbody & Company after he attended New York University. “I started out as a clerk. My job was to look after job lot orders,” Gero says. He would go on to work on the New York Stock Exchange floor.

Gero took an aptitude test to become a salesman at Goodbody, but it indicated he was not salesman material and he was moved to the research department. “They did me the greatest favor in the world, because I learned about 2,000 different stock answering wires from all the branch offices as to why this company was up and that one was down. I became an investment manager and within a short period of time I started buying memberships,” Gero says.

Gero bought a membership in the New York Mercantile Exchange (Nymex) — where he would later serve as a board member for 30 years — for $5,500 in the 1960s. He would buy memberships in all the New York futures exchanges and become an active trader in the Comex metals markets.

When gold was once again free to trade in the 1970s, Nymex offered two gold contracts and Comex one.
“I traded one of the first gold contracts in December of 1974 and my specialty was gold spreads and trading gold against platinum or gold against silver,” Gero says. “As a dual member, I would run from pit to pit on the exchange floor because I specialized in executing spreads, whereas the average broker did not want to leave his set spot in the ring.”

Eventually the contracts traded at different locations and the liquidity settled in the Comex contract so that trade ended.

Gero was always filling paper in the pit and never solely depending on his personal trading for income, though he always traded. “I was never a big trader; I was a steady trader. I would have 300-400 lots on in spreads, not outrights. I never carried more than 10 outrights. That was my discipline,” he says.
Gero calls his style "seat of the pants trading," along with technicals, but he developed a system for trading gold spreads. “I traded against interest rates,” Gero says. “If I saw interest rates moving up, I would be buying the gold spreads. If I saw interest rates moving in, I sold the gold spreads. I would have been buying April/June at $1.10 and selling it at $1.30 or $1.40. When we got close to the rollover, all the people who are long gold are going to stay long and they are going to buy the June and sell the April.” That trade worked over the years for Gero, but it provided only a slight edge and had significant margin requirements. He hasn’t traded gold spreads in 18 months because interest rates have remained at zero.

“It is almost impossible because you can’t make any money with a $1.10-$1.20 spread by taking delivery in April and redelivering in June. The banks can do it because they have inventory,” Gero says. “[But] I make $120 per contract and put up margin for both and also when I take delivery for the April I have to put up full money.”

Also the strategy required a backwardated market. “It can be consistent as long as the April trades under the June. In commodity contracts where you have a contango you can’t do it,” he says.

The strategy worked well when interest rates were increasing incrementally a couple of years back.
“April comes, I take delivery, June comes and I redeliver. In the meantime, I have June/August or August/October to widen if interest rates are up, so every time I do this strategy I am getting more for my money.”

While the strategy has been dormant due to interest rates, Gero has taken to trading the gold ETFs and analyzing the market for RBC. While the spread strategy will work again when the Fed begins its exit strategy, Gero always maintains some gold holdings. “For me, holding gold over the long term preserves some purchasing power and it is sort of insurance against currencies going crazy,” he says.
He will always hold gold. After all, it saved his life.

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