Two Big No-No’s for Gold Investors

The recent Resource Investment Conference in Vancouver may well have set a new attendance record for that venue. So many company booths filled the display area that they overflowed onto the confines of the massive Vancouver Convention Centre West. I was asked to speak in place of Kitco’s Jon Nadler, who was unavoidably absent from the conference. My topic was entitled The Precious Metal’s BIG Money Train is Leaving the Station…Are You Ready?  The thrust of my talk was not whether a major new leg up is imminent, or even a mania phase like the dot-com bubble of the late 1990s. The more immediate concern is that anyone who intends to ride what many of us have long believed will become the Mother of All Bull Markets had better establish and hold onto a core, non-trading position, and sooner rather than later. These holdings should be kept in the portfolio until the owner makes a subjective decision that the precious metals bull is either over or on its last legs. 

Trying to play top-caller, going 100% into cash before a “reaction,” then attempting to get “all-in” again before prices blast off, is a sure-fire way to get knocked off the precious metals bull, landing on one’s back, and most likely staying there for the duration. Granted, there is nothing wrong with trading some holdings into market strength and then looking to buy back on a reaction.  Doing so is part art and part science – and, yes, it’s not always possible to get back in at a lower price. However, the greatest traders out there – the iconic Jesse Livermore, the late great Sir John Templeton, legendary goldmeister Jim Sinclair and his father, Bert Seligman – all sought to lower their cost basis by carefully selling certain rallies and buying certain declines.   In Edwin Lefevre’s classic book, Reminiscences of a Stock Operator,  Jesse Livermore noted that “Men who can both be right and sit tight are uncommon…”  And later, “Don’t try to sell and buy back (core positions) on reactions in a bull market.” 

What Losers Do… 

There are two things no one can afford to experience in a bull market: the complete loss of one’s capital, or the loss of one’s core position; for to do so is the financial kiss of death. Stewart Thomson eloquently states the rationale thus: “Only losers try to trade their way through a bull market with core positions.  They end up at the end of the bull with nothing.  Winners grip core positions tighter in corrections and add to positions.”

Lose your capital and you won’t have the monetary means to play the game. Lose your position while you watch prices rocket up and away from where you “called the top,” and you will almost certainly have lost the psychological capital necessary to get back into the game – probably for the rest of the bull market.  There’s a saying in mining company circles about being present in order to take part in a business decision: “If you’re out of the room, you’re out of the deal.”  So, if you want to stay “in the room” you had better be diligent about holding onto your core positions as long as you can. 

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  • Chemical February 4, 2011, 9:00 pm

    Mercurious,

    Absolutely right! EVERYONE should always be adding to their PM holdings. I’m greedy and do most of mine with mining shares, but I still make it a point to buy physical when I can. The other day, I bought a 1/10 oz. gold eagle and a 1 oz. silver eagle. Not much at all, but it adds up.

    I agree, keep some cash for expenses (hopefully never more than $1,000 in your checking acct.) and the rest in metals.

    Believe me, on the day they re-issue a new currency or put the banks on holiday, you’ll be happy NOBODY can touch your physical, which probably will have just shot through the roof in terms of street value.

  • Robert February 4, 2011, 7:16 pm

    When people ask me when I would consider selling bullion, my canned answer is “When the day arrives that people will voluntarily share the excesses of their production without mention of reciprocity”

    That is the day that the anti-Gold monetarists will have won, but even on that day, I think I will simply become a metal sculptor who uses Gold as his medium… proving invalid the premise that Gold has no utility… 🙂

    • Benjamin February 4, 2011, 7:53 pm

      And should you become a sculptor of barbarous relics in a utopian world, I’m sure your customers would give you something for them…

      The finger. Some might flip you a couple of birds to get by on 🙂

      But that’s okay. They’re transferable. All you have to do is go up to someone else, take their stuff, and give them the secret friendship sign too. Who says communism doesn’t work?!

  • Mercurious February 4, 2011, 6:56 pm

    If you’re just stumbling into PMs and came across this column, you would do well to read Rick’s words and the comments that follow: in and of itself, just doing that will keep you from much mischief you can cause yourself trying to play trader.

    I have very large core positions–relative to total net worth–of gold and my favorite, silver. I do not save in cash, I save in metals with cash just for daily expenses. I am not a trader and am only interested in long trends, but I trade in tax advantaged and my Roth cap gains-free accounts. Rather than look at those as my last desperate hope and play it conservative, I trade in and out freely, knowing my core is tucked away and I’m not touching it.

    Like so many areas in life, the extremes will kill you if you don’t manage your risks. Having your core of protected and trend-following wealth nailed down enables you to be looser on your trading accounts. Before I learned this lesson, life was a lot less fun and I made a lot less money.

    Risk management to me is about minimizing the chances of making a mistake in my analysis more than specific techniques to mitigate the market going against my position. I think less about what I’m buying and more about why I’m buying it.

    • Robert February 4, 2011, 7:17 pm

      Sage Advice Mercurious… thanks.

  • merek February 4, 2011, 6:09 pm

    Rick,

    I looked at the agenda for the vancouver conference and thought I should go, but shite got in the way. Had I known you were speaking, i surely would have attended.

    Merek

  • laurent February 4, 2011, 5:03 pm

    Nitram, though history is always a good dipstick to use for forward evaluations when looking as seasonal charts, one should probably see this season as unique in history and widen the speculations as external forces brand new to the game have been brought to the table. These are not normal times. We will see many anomalies. A season of extremes is upon us. Some will get clobbered and some will reap tremendous harvests as rarely seen (seasonally).

  • nitram February 4, 2011, 3:27 pm

    silver seasonally—–http://seasonalcharts.com/future_metalle_silver.html

  • nitram February 4, 2011, 3:24 pm

    long term bull but seasonally the market is moving as usual- stop at new high. http://seasonalcharts.com/future_metalle_gold.html

  • Pieter du Plessis February 4, 2011, 9:44 am

    Surely the answer is to have your core holdings in physical metal and not in “paper”. Holding paper PM’s should be used as a leveraging /hedging strategy, never as a store of wealth. Some people appear to have difficulty being short-term bearish because they hold physical PM’s – this is not clever. During pullbacks, short the PM’s using paper, take profits early and convert the profits into physical! During rallies, take advantage of the leverage afforded by derivative instruments (this can of course include shares in mining companies), take profits early and use the profits to buy physical.

    One you have your core position in physical metal, you of course need a pool of money to allow you trade – money was invented for making trading easier, not to be an asset! There is nothing wrong being all in cash or all long or all short in your money pool (depending on you short term views), as long as it is always understood that the size of the pool should not be any bigger than what you need to trade (and what you can afford to loose without significantly impacting on your wealth).

    I prefer to think of assets as things that I can touch. This may be a means of production or something that has been considered as a store of wealth for many centuries and is likely to remain so for many more centuries.

    Paper contracts (futures, options, warrants, even share certificates) are only verbal promises reduced to writing. So is paper money. Promises may or may not be kept. When you live in 1st world country, it is easy to assume that the rule of law will always apply and that contracts can readily be enforced, but is there anybody left that still believes that laws applies to the big banks?

    Fiat money is defined as something where the intrinsic value of the material substance is divorced from its monetary face value, that is created and issued by the State, but is not convertible by law into anything other than itself, and has no fixed value in terms of an objective standard. How can this ever be an asset and be seen as a seen a store of wealth?

    The real debate thus should not be on what to use as a store of wealth (and of course a way to benefit from a boom in precious metals), but rather how to secure this physical wealth against the actions of governments intent on taking it from you and redistributing it!

  • SDavid February 4, 2011, 7:09 am

    I agree with what you say with respect to “calling a top,” and how we can ill-afford to trade precious metals based on this premise.

    Should (could) that also apply to the markets in general?

    Maybe your trading partners have it right? Perhaps we can “sausage” our way from the lows in March of 2009 to new highs this year because no one but the ridiculously optimistic would expect it?

    I also wonder how the old school “Greatest traders out there” would have fared in today’s market matching wits with government intervention and algorythm programs. Yes, Phil Helmuth won his fair share of bracelets at the World Series of Poker (just ask him) when the field was small, but what has he done since?

    Today, traders are like the inconsequential humans in the movie “The Terminator.” We are battling cyborgs (HFT’s) who are out to destroy us.

    It’s a much tougher game now than when Jesse Livermore was around. I think a little education would have gone a long way back in his day.

    It’s not the same anymore.

    However (here is a plug) your Hidden Pivot course lives on, and it has kept me out of more trouble than I could have possibly imagined. And that is with my very minimal understanding of it.

    I don’t usually agree with what you have to say (and when I do, it’s usually begrudgingly), but I will always be indebted to you for what you have to teach.

  • Benjamin February 4, 2011, 5:27 am

    True! True! True! Never, ever treat your gold and silver as disposable, or secondary. They are your Plan B when other things don’t work out. They are, your savings, your lifes work.

    And I’ve found no better way (that I’m comfortable with) than ratio trading. Look at it like this: Until the world returns to sanity, that ratio chart is going to be moving. You can wait for big swings, but if you’ve enough of a solid base and plenty to play with, you can grab some more on smaller ones. Depending on what I see coming up, I might increase my play amount or my savings. But once done, I don’t shift anything back and forth. Final is final. Once in savings, there it stays until I have to sell any. And even if the price crashes allll the way back down, the ratio probably won’t stop moving, nor would it kill me, as that kind of price move would mean (hyper?) deflation.

    Of course, everyone has their differnt needs and different plans. But the rule still holds regardless of what those are: The metals serve you best only when treated with discipline and respect.

  • Chemical February 4, 2011, 3:13 am

    Ricky Ackerman called the bottom a few days ago and said it came in lower than he expected. Since then, gold has gone from 1310ish to over 1350. My only concern is not having enough of the right shares when/if the stocks actually get into the run. Maybe I’m crazy for hoping for the Internet-like boom in mining shares, but that’s why I’m here and that’s the ONLY way I will judge success. I want to change zip codes once it’s all over. That’s how I’ll know it’s over.

    • charles kemper February 5, 2011, 1:00 am

      Not only Rick’s call has come in at this time. Chuck Krew’s oscillator is flashing a major low as is the technical work of Turd Fergussen. None of us are going to have enough of the right shares if this is it, not even me and I’ve been piling em up since the 90’s.

  • FranSix February 4, 2011, 2:26 am

    Thank-you Rick, I was hoping for some very good advice about what to do.
    The long term monthly log scale chart (without adjusting for inflation) is saying that we are very likely completing the beginning of a 3-wave extension in elliot wave terms:

    stockcharts.com $gold

    http://tinyurl.com/monthlylogscalechart

  • jeff kahn February 4, 2011, 2:25 am

    That’s why bullion is the key. Nobody trades bullion.

  • don waltman February 4, 2011, 12:35 am

    Nadler not present? Were his banking sponsors afraid his transparency would be obvious? Or maybe genius Ned Schmidt wouldn’t give John any more free tips.

    • Robert February 4, 2011, 6:50 pm

      Nadler’s Elliot Wave calculator must have been broken that week…

      Or maybe he and Ron Rosen were out comparing notes on how to be successfully short-squeezed like a Pro.

    • Bay of Pigs February 4, 2011, 7:35 pm

      As someone who has attended the Vancouver conferences (excellent and free BTW), for many years, I can safely say Jon Nadler is one of the worst advisors you could ever listen to on gold. Dennis Gartman is a close second. Why these idiots (I could say much worse) have any audience on gold really baffles me. Nadler should have been fired years ago, and I called Kitco myself to tell them that. Experts? Try Sinclair, Embry, Turk, Russell, etc…

    • Robert February 5, 2011, 12:55 am

      “Why these idiots (I could say much worse) have any audience on gold really baffles me. ”

      -I read Nadler religiously everyday.

      A successful contrarian must understand the commonality of the opposing mindset.

      The fact that there is one person out there who thinks like Nadler (Nadler himself) indicates to me that the path I’ve chosen is nowhere near a dead-end.