December 22, 2010
In a recent conversation with one of you, I was reminded I had been recommending short gold for a long time…and have obviously been wrong. This is true. And it is also true that picking tops is pretty much the toughest trade to make in this business…but it can also be one of the biggest if you ARE there when (and yes, if) you are right and the anticipated market collapse finally takes place. Futures tend to fall MUCH, MUCH faster than they go up as the overwhelming majority of investors only approach the market as buyers. Consequently, in a story we have all seen 100’s of times (at least), top heavy overly popular bull markets turn into avalanches as all those “owners” turn into sellers.
I look at Gold (and Silver) and my 30 years of commodity futures experience scream, “SELL IT!”. In fact, my guess is, being short the precious metals will end up being the most spectacular trade of 2011. I say you can take the bullish “logic” that analysts everywhere are bleating and toss it out the window. Whether it’s stocks, bonds or commodities, this whole trading/investing thing is nothing more than the world’s biggest video game, and the prices of all these pieces of PAPER are nothing but a function of mob psychology driven by fear, greed, the media and financial industry fluff machines. Nothing is real. It all about players getting in and getting out, sometimes slowly, and sometimes in absolute panic. It matters not what the market may be.
One of my personal trading reminders says:
POPULAR IDEAS TEND TO LOSE MONEY
Yes, being in the crowd does not mean you can’t make some money doing so, but sooner or later, EVERY bull market reverses direction…and virtually ALWAYS ends up catching the masses totally on the wrong side of what’s happening; As I noted above, it has happened 1000’s of times…You finally reach the point where everybody who conceivably would buy it, HAS bought it, in which case, there is then is only one direction left to go…DOWN, and usually in a hurry…And If Gold is not one of THE most “popular” ideas I have ever seen in this business, I don’t know what would be.
Another of my reminders is:
ONE GOOD TRADE IS ALL IT TAKES
This is a tough business and being on the losing end of things can get you down…but I also do know, all you really have to do is catch one market going vigorously the right way, and the leverage in this game can produce some astoundingly big results. As one of my trading heroes, George Soros, once noted (paraphrased), “Sometimes the money just comes in globs…but you never know when it’s going to turn out that way”...So what you have to do is keep yourself in the game…which is what I resolutely, but I assure you, not blindly, intend to do with being short gold and/or silver.
I get up every day knowing this is the one trade I personally do not want to be out of--- for even one day---as I “know” what the potential is here. I FIRMLY believe, just like stocks in 2000 or 2007, or Crude in 2008, or real estate several years back, or any number of bull markets I’ve seen these past three decades, we are going to see a crash in gold prices unlike anything these swarms of NOUVEAU bullish commodity experts would ever imagine possible...There is no certainty it will be the case here, but commodity bull markets do routinely get slashed by 30-35% (and more) in a little as a few months time, and with the current bullish Gold rhetoric being touted longer and more pervasively than any commodity ever (in my career anyway), I think the odds of a $350-$400 sell off are quite high.
SO I WILL CONTINUE TO STAY SHORT GOLD. I VIEW EVERY NEW HIGH THAT ESSENTIALLY GOES NOWHERE AND IS THEN FOLLOWED BY A REVERSAL (SUCH AS WE HAVE JUST SEEN) AS POTENTIALLY THE HIGH TICK IN THIS MARKET. IT IS THEREFORE MY INTENTION AND RECOMMENDATION TO OWN SLIGHTLY OUT-OF-THE-MONEY GOLD PUTS UNTIL THE BREAK DOES OCCUR…AND WHEN IT DOES, I WILL DO MY PSYCHOLOGICAL BEST TO SIMPLY HANG ON AND LET IT HAPPEN. I DON’T JUST THROW NUMBERS OUT THERE. I DO STILL HAVE UNDER $1000 AS MY FIRST (AND FAIRLY QUICK) OBJECTIVE IN A BEAR MARKET THAT I BELIEVE WILL GO ON FOR YEARS. I REGARD ALL THE NOW COMMONPLACE OPINION ABOUT COMMODITIES BEING A “NEW ASSET CLASS” AND GOLD BEING A REPLACEMENT FOR CURRENCIES AS NOTHING MORE THAN TYPICAL TOP OF THE MARKET ERRONEOUS FODDER FOR THE MASSES. I SUSPECT THAT SOMEWHERE LONG BEFORE 2011 COMES TO AN END, MILLIONS OF INVESTORS WILL BE LOOKING BACK AT GOLD AND ASKING THEMSELVES HOW THEY DIDN’T SEE THE ABSURDITY OF $1400 GOLD OR $30 SILVER…I MEAN HOW MANY TIMES DO YOU HAVE TO SEE, HEAR AND FEEL THIS SORT OF MARKET SITUATION TO NOT RECOGNIZE IT WHEN IT COMES AROUND?
Yes, I have a VERY strong opinion, and no, this absolutely does not mean I will be right…But for me this stuff is all about semi-educated guesses, risks and rewards…and while I know I have been wrong, and know I still may be wrong, I also know this trade is basically identical to one I have seen over and over and over in this crazy business…And the potential payoff, I believe, could be truly enormous.
ONE GOOD TRADE IS ALL IT TAKES
Here are some charts and numbers…
Here are a couple of options worth looking at….
Here’s another one…
And there are two futures contracts to work with…The 100 ounce contract in which every $1 move = $100 or the 33 ounce contract in which every $1 move = $33…Right now, the classic futures approach would be to be short with a stop over the highs.
There really are any number of ways to approach this…including the 2 and 1 as I doubt this market will go sideways for much longer at all…My major point is, GET ON THIS NOW, WITH SOMETHING…If it makes new highs, back off the trade and take a new look…But if you think this idea makes sense, DON’T make the mistake of thinking, “I’m gonna sell it when it gets to so and so” …This stuff never works that perfectly and nobody ever gets the number exactly right…SELL IT NOW…DEFINE YOUR RISK….FORGET ABOUT IT.
Still see a much higher US Dollar
For several years now, all you have heard is the US Dollar is going to hell…that the Dollar HAS to go lower…that we have reached the point where nobody wants to hold Dollars, etc…All you ever hear is, “the weak dollar”.
Even so, ANY time there is a crisis, the dollar takes off on the upside…which, to me, infers there is inherently great value in owning Dollars.
To save a few brain cells, I have just copied the following paragraph from my November 12th newsletter…
The USA is STILL the safest, number one, and most highly desired business and/or residential location on the planet. The United States is STILL the locomotive for the world's economies. NOBODY ever turns down the opportunity to enter or operate here…And the US Dollar is NOT going in the tank, nor is it about to be displaced as the world's #1 reserve currency…I assure you, nowhere are you going to find people actually dumping US currency in favor of owning Chinese Yuan, Russian Rubles, Brazilian Reals, British Pounds, or anything else…And this is not just patriotic fervor on my part as an American…To me, after having spent 6 years living outside the States, and having travelled through over 40 countries, I KNOW the value, ANYWHERE, of having that crinkled USA issued piece of paper in your hand…It is accepted, hoarded, and “treasured” EVERYWHERE on this planet and it is NOT going to hell. Too many people DO want to own it.
To that I will now add…Yes, we have our problems but the USA is still the world’s primary economic engine…Europe is a mess, and with some stronger countries (Germany, for one) expressing great displeasure at having to bail out their weaker EC members, it now appears some degree of “fracturing” of the Eurocurrency has become a very real possibility…which would be a BIG deal and would certainly lend (or is lending) a TREMENDOUS boost to the Dollar…Beyond that, I also think it is entirely possible some sort of “crunch” may be on the horizon in China (which could take much of Asia along with it)…Yes, they are the new 1500 pound economic gorilla but they also have some potentially EXTREMELY severe problems to deal with, inclusive of a real estate bubble that might easily dwarf the one we are still suffering from here. That issue, as well as a domestic 5%+ inflation rate, now has the PBC (China’s Fed) quite forcefully hitting the interest rate brakes…The point is, if either of these situations, actually encompassing two continents, were to develop negatively, I am fairly certain it would dramatically affect the dollar on the upside.
The Dollar IS the world’s reserve currency. This is not changing. I continue to believe the low made in 2008 was the beginning of a major bottoming formation and the Dollar is now in the early stages of a rally that will extend, at least, up into the mid 90’s, or approximately $15,000 per futures contract from current levels.
Think about all the foreign concerns that are now buying and establishing business concerns here. This is not the only factor involved in currency values but I will tell you NO foreign interests are selling what they own here…
So I am still long the Dollar and still buying futures and/or call options…
As in the Gold market, there are also various ways to approach this trade…using futures and/or other option strike prices…
Still Bullish on Treasury Bonds
Bonds have continued to drift lower…I still think they are a major buy but will save any comments for another newsletter…It's my 23rd anniversary and I have to get myself in gear on a few very important fronts...
Give me a call guys…Get a piece of this Gold and Dollar…As ever, I may be dead ass wrong but I do think these are both very big trades…
Thanks for your attention…Wishing you all a Merry Christmas and Happy New Year…and I KNOW 2011 is going to be a great one…