December 12, 2005
Wrong on Gold
I have recommended shorting Gold twice since mid-September and have been wrong on both attempts. Several months ago, with seemingly everybody all over Gold on the buy side, and with all the press there was about $500 Gold being almost a certainty, I just couldn't imagine the masses being proven right....But they were....and I was dead wrong. I am now on the sidelines in Gold....
I would add this is an excellent example of why I constantly make recommendations using the Both Sides Strategy. The following quotes are from the "Philosophy" section of our website:
"Our experience is, when most people (ourselves included) are wrong, they are very wrong. Not only does the market not move in the direction they anticipated, many times it goes exactly opposite their opinion in a big way. We find, if we are wrong, using this strategy, even a moderate move the wrong way may get you most, or all, of your money back."
"If you are truly right in the market, you will lose the money you spent on insurance, but you will probably not miss it. If you are right, as a function of the leverage you work with, you have an excellent chance to make enough on the trade to see the insurance as only a small relatively small cost of doing smart business."
With Gold having rocketed almost $60.00 since October 7th when we re-entered on the short side, using the strategy with just about any reasonable combination of puts with calls (as the defense) would have easily gotten you 100% of your money back, and most likely would have done so before even half of this $60.00 move had taken place.
If you are interested in a more extensive discussion of the Both Sides Strategy, click here to go to our main page and scroll down to the "Philosophy" section of the website.
I have been sitting on Cotton since Sept. 6th and have watched it do nothing but consolidate sideways. While frustrating, my experience has been this only increases the odds that a large move is more imminent and absolutely believe it could begin any day or week now. On the plus side, this has decreased option volatility, meaning much cheaper option prices and considerably more leverage than was the case several months ago.
During the past 30 years, Cotton has averaged a 20 cent range between now and July, meaning it MOVES, making this about as good a "2 and 1" as you will ever get in this business. Cotton is typically a BIG mover and with China currently gobbling up one out of every three bales the world produces, my guess is somewhere in the next 12 to 18 months we'll be talking about $1.00 Cotton as opposed to the "we'll never use it all" mentality I currently see written about everywhere. Using the Both Sides Strategy, I will stay long this market, no matter what it does. I continue to think a MAJOR bull move is coming.
I have been back on this one since December 1st and not much has happened. There's not really much new to say here except to again point out Copper prices are at stratospheric levels and this market has had a historical tendency to just collapse when the downturn finally does come. I continue to recommend shorting this market using either futures or the outright purchase of put options in the March 2006 contract. I think Copper could break 50 or 60 cents VERY quickly.
For more comment on Copper, click here to see our December 1st newsletter, or access it and other Copper related newsletters under "Newsletter Archives".
Buy Treasury Bonds
I continue to see Treasury Bonds going higher (as long term rates go lower). With seemingly the whole world expecting exactly the opposite (higher long term rates) this idea may sound insane, but, as I've pointed out many times before, I consider Bonds to be THE CONTRARY OPINION MARKET....This is important as when opinion in any market becomes as one sided as it currently is in Treasuries, it can dramatically change the fundamental supply-demand equation out in the future. As one example, when everyone is "certain" rates are going higher, many institutions, corporations or individuals who expect to borrow in the future go ahead and get it done now (as opposed to waiting when they "know" it will cost them more in the future). This leads to borrowing pressure down the road being less than expected, the result being, lenders end up reducing rates as they compete to attract new borrowers...This is just one small example, and an over-simplification, but it is one of the very real factors in moving Bond prices up and down.
For more extensive comment on why I am bullish on Treasury Bonds, I have combined excerpts from our Oct.7, Oct. 14, and Nov. 8 newsletters which can be accessed by clicking here or under "Newsletter Archives" on the website.
I am still buying March 2006 Treasury Bonds and believe the low made roughly 5 weeks ago was THE low. I see the trade noted below as another "perfect 2 and 1", as, if I am wrong, I would expect to see Bonds fall sharply enough through that recent low that getting 100% of your investment back should almost be a given. Conversely, if I am right, and Bonds have turned higher, I would expect the rally to initially carry, at least, to the 118-120 area.
Thanks...Give me a call if you want to know more about any of this...