Why I'm Re-Establishing My Gold Position

When I started my blog, it was not my intention to turn it into my personal trading journal. It was - and still is - my intention to bring market issues to the fore, stating my holdings in a position effected by the issue under discussion to fully disclose whatever conflict, and thus bias I may hold.

However, it has been my experience, when informing people of my profession, they would insist I proffer an opinion about the market or a particular stock or whatever I may like at the time. At first, I would freely offer my opinion because I love stocks and I love to talk about stocks. However, upon running into that person some time later when they would ask my opinion again, I would say something like "Oh, I blew out that position a while ago," usually at a substantial profit whilst the person to whom I had given advice had far less of a profit or a loss. As a result, I became hesitant to give my opinion to most everyone, and never to people I do not know or don't know very well.

This blog puts me into a bit of a quandary since I feel I must give full and fair disclosure when stating an opinion, and feel obligated to inform readers when I change my positions but would rather not disclose any trading lest people actually act on what I am writing. (God forbid. - ed.)

Which brings me to my gold position, which I re-purchased on Monday.

Last week, I stepped aside from the plunging gold market and liquidated everything I had. I changed my mind during Monday afternoon's session, and bought it back. This is what I wrote last Tuesday:

The Fed meeting provides a catalyst. With stocks running up into the meeting and commodities selling off, the risk of a sell-off in equities is high while the lows for commodities in this downdraft may not be far away, perhaps measured in days. But for now, I'm going to protect my capital.

Full disclosure, I am not convinced we have seen the bottom in gold, and will be quick to pull the trigger to blow out my position if gold breaks below the $846 low of last week.

So why buy now? Call it intuition, a hunch, a gut feeling, or just plain stupidity.

First, I feel we may have seen the bottom in gold. Gold fell 18% from its high six weeks ago. That is a pretty good correction. The last big downdraft in 2006 saw a 25% decline in a month.

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The recent sell-off may be a similar one.

Second, the chart looks horrible at the moment, which is my biggest near-term concern. But the chart looked horrible in 2006 as you can see above. Buying when the chart looked horrible in 2006 was enormously profitable as gold fell to $550. Normally, I would rather buy great set-ups, but buying dips in secular bull markets - of which gold is in currently - is often a profitable strategy.

That being said, I will not hesitate to sell if gold continues to break down.

Third, gold is deeply oversold. Every time the Relative Strength Indicator for gold has fallen to 30 or below, it has been a time to buy. The RSI hit 30 last week, as you can see at the top of the chart below.

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Also, look at MACD at the bottom. It is getting to levels not seen since the violent sell-off in 2006. (Oh, you're going to get people upset referencing MACD as an oversold indicator in the comments section! - ed.)

Fourth, investors have gone back to several commodities over the past few days with a vengeance. Oil broke all-time highs on Monday (though on light volume), and it looks like other favorites such as coal and potash are going to new highs in the near future.

Patriot Coal (PCX), which I own.

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Arch Coal (ACI), which I own, but have been slowly trimming.

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PotashCorp of Saskatchewan (POT), which I also own.

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Now, the coal stocks look very over-bought at the moment and should pull back, but after the recent brief sell-off, investors have come back to these stocks hard. So why not gold too?

Finally, has the dollar really bottomed against the euro? It sure seems like everyone thinks so. But is everyone right?

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Maybe they are, I don't know. I know I called the bottom of the dollar some time ago, only to be proven wrong. (Sell your gold! - ed.) And I still believe the dollar is in a bottoming process.

However, the gold bull market is not merely an anti-dollar trade. After all, gold has risen in all currencies over the past decade, and the secular bullish trends pushing gold higher remain intact.

Nor is it merely a fear trade, as gold has risen since the market bottomed on October 10, 2002 when it was $310 an ounce. In the 2002 - 2007 equities bull market, gold outperformed stocks. Which brings me to the action of the past few days.

Clearly, fear of a systematic collapse in the financial markets was one factor pushing gold higher over the past few months. Now that fear is abating (at least for the moment), investors had been liquidating gold and other commodities and buying risky assets. At some point, I believe the fear trade will end, and fundamentals will reassert themselves - they may actually be reasserting themselves now.

Over the past few days, the momo traders have been pushing up the old favorites - Google (GOOG), Apple (AAPL), Research In Motion (RIMM), Mastercard Inc. (MA), etc. In the meantime, commodities are bouncing.

It could be that the momo trade is getting long in the tooth and is about to end while the commodities reassert themselves. Or it could be that the momo favourites keep rising and so does gold, as happened during the 2002 - 2007 equities bull market.

The pattern of the bull market in gold has been to move sideways for some time before exploding higher. We may now be in a consolidation phase, and thus gold is likely to move sideways for awhile. However, until shown otherwise, we are still in a bull market for gold, and I want exposure - at least today. But then again, I could always change my mind again tomorrow.

Note: One reason why the metals are rising is because power is being rationed to mines.

Comments

[zenalgorithm]

Congratulations on your indecisiveness.

[GMiki]

I'm not a trader. I don't trade in and out of gold though I took some spending money from GLD when gold was in the $990s. I started in physical gold when it was under $300. I obviously haven't been disappointed. I was much later to silver, but have made some nice money there. Or, more correctly, I've retained my purchasing power in a highly inflationary environment. While a few sectors will do well, the precious metals are great for me, along with energy. I'd suggest the microcaps for more bang for your buck, but hold on as the trading right now is volatile.

[Mister C]

You do know what happens to those who try to time the market?

[maelstrom]

For what it's worth I too sold off only to do a 180 an buy back in a week later. This is at times a "take your profits when you make them" market and other times better to hold. I feel gold is the common denominator of the world currency markets, so I will be adding at advantagious times and selling in the same manner.Peace and Prosperity to all

[KBowen7736]

You sold last week and bought back on Monday..... So what you are saying is that your portfolio just lost 5%! If you seriously think the dollar is in a bottoming process then why are you buying gold? In your case, some things are better left untouched. The gold market needs a little more conviction and a little less gutlessness here and now!

[windinmyface2]

You don't seem in a position to be giving advice. It sounds like you are trying to convince yourself, or justify that you bought into it again. I think you should go to Vegas with the rest of the gamblers. P.S. I think your Coal, and Potash are good choices, for a gambler though.

[David Lentz]

Do you often change positions like this -- with a 100% liquidation followed by buying back in -- within a ten-day span?

Are you now, or have you ever been, a day-trader?

(questioner edges away slowly, putting some space between himself and the object of his questions)

[David Lentz]

While I personally am goosey as all get-out about gold, and have my finger on the trigger, once I decide to pull the trigger and sell, it would take a mindset change of earthquake proportions to get me to buy back in. I find that bad decisions are followed by more bad decisions more ofter than not, as they are rooted in a wrong understanding of the situation.

Which is not to say that I don't make mistakes, I do so all the time. Most often they are mistakes of timing, and so if I buy too early, I ride out the subsequent slide until either things turn around or I decide that I was wrong and take my lumps and exit the position.

On the sell side, I can either sell too early or too late, and I can tell you that it i only with the utmost reluctance that I buy back in following a premature sale. Better to let that opportunity go and look for others -- there is always something to buy or sell the marketplace, but dithering about a particular item is almost certainly the way for me to lose money.

But on the plus side of a decision to buy gold at this point in time, I noticed in today's WSJ a piece about how Congress was running out of time to act on the resolution to allow the IMF to dump 400M tonnes of gold, which should give gold some respite and allow it to climb along with oil over the summer. I continue to watch this, as I feel that when the IMF DOES dump its large chunk of gold, the resulting splash will drive the USD (and euro and every other paper currency) higher for many months, perhaps long enough to allow the global economies to crawl out of the global recession and begin the next cycle. THEN it will be time to exit gold.

But as I stated at the outset, I am personally very nervous about gold. It is a drop in the bucket alongside the ginormous pools of paper currencies, regardless of whether they are inflating at 8% or 18% a year.

If the Fed should ever decide it is done replenishing the vaporized credit liquidity and raise rates to combat inflation, the end is over for gold's run in this turn of the wheel. I believe that will happen, not this year, but perhaps next year or the year after. Paul Volker, where are you?

[ritr54]

Volker pushed interest rates quite high before gold started to plunge.

[User 150045]

Courageous article ! We´ve all been there done that.

[Douglas]

Re: IMF Sales
With 176 votes for and none against (9 no-votes), the gold sale is clearly a priority in the IMF. So they will be leaning on US congress to approve. Also, any congressman with an ounce of education in economics will want to move this through asap in order to get some relief from soaring commodity cost to Americans (well, some might want to wait until elections this fall, but that's another can of worms.)
Point is, even if the IMF sale doesn't crash gold on its own, you could be sure that gold won't be going up...

[jt]

"Also, any congressman with an ounce of education in economics will want to move this through asap in order to get some relief from soaring commodity cost to Americans"

Let's play with that a bit...how about: "Also, any investor with an ounce of knowledge about commodities, the Fed, and the fraud of fiat currency will know that the "soaring commodity cost to Americans" is as a direct result of the absolutely uncontained and self-enriching expansion of the money supply by the Fed and other central bankers and will be trading in their paper money for REAL money...silver and gold."

Commodities are finite...the "dollar" (aka, the Federal "Reserve" Note...ie, the Federal (we) Reserve (the right to have absolutely NOTHING in reserve to back up this paper) Note, is rapidly becoming infinite. jt

[CeeEmDish]

^^
I have very recently been turned on to investment, and gold in particular, for the exact same reasoning as you JT. I plan on saving as much as I can for several months to a couple years in order to fund my worldly travels. I was unsure about keeping my savings in the USD fiat form, especially since OIL is likely to go up and the Fed is still dropping rates, so I got a few ounces at 174 on Monday. It was somewhat exciting to see the prices rise the next day - due to oil I imagine - but now it's unfortunately falling.

It is quite naive to let your hopes and expectations diminish only after a few days of market watching, all I can hope for is an overall rise in the yellow metal over the next several months, and even more hopefully over many more years as a long term investment/hedge against inflation. I do not trust our scamming Fed bank, nor do I trust the USD, so I have placed my trust in a tangible savings method to fight against a seemingly imminent recession, or at least OIL-Rise/USD-Collapse.

Good post jt!
But my question is, does this guarantee a continued increase in gold? Of course there is no guarantee HA, what am I asking that for.

The market is indeed a twitchy thing, hard to understand, hard to correctly predict, with many dynamic variables involved. Certainly a burden for a newcomer as myself.

[CeeEmDish]

*874 on monday ^

[enviro111]

The IMF isn't going to dump its gold on the market. Here are three good reasons why.

1. Gold prices are relatively high right now and politicians control the IMF. When have politicians every made a bright move when it came to trading assets? Answer: Almost NEVER. Witness the Idiot Gordon Brown - sells England's gold - an asset it has held for centuries at the lowest real prices in history. If the IMF does sell its gold, it will be a signal to buy, buy, buy.

2. One big factor that protects the US dollar is the USA's huge gold holdings. The IMF gold is actually a US holding to some extent (owns a partial interest in it). At the end of the day, the USA must be able to protect its dollar. Gold is last defense. It is unlikely they will let it go.

3. The IMF tried gold sales in the 1970's and it didn't keep the price down or inflation in check. It won't work this time either. Politicans are dummies, but not all of them are complete fools. They can easily check up on the effectiveness of past gold sales and see they didn't work.

4. Any IMF gold sale will be in name only. The gold will never leave the vault. It will just have a new owner's name attached to it.

5. A threat of gold sales always seems to spook speculators and cools off a runaway market. If the IMF sales actually occur, they will lose this valuable market manipulation tool.

6. A sale of IMF gold presumes that they actually hold the gold in the first place. Most likely they do have it, but if they don't, the emperor really has no clothes.