Gold And Silver: What To Do Now Redux

Includes: GLD, SLV
by: Nigam Arora

Yesterday when I submitted this article, the gold future contract was hitting $1912.

These are my recommendations:

Those holding GLD and are aggressive investors may consider taking profits on 25% of the position right here, putting a tight trailing stop on another 25%, and holding the rest.

Those holding GLD and are conservative investors may consider taking profits on 50% of the position right here.

Those not holding GLD may not enter at this point but patiently wait for a pull back.

The chart shows that the gold price dropped $83 from the time my previous article was submitted to the time of this writing. There is no telling where gold will be by the time this article is published.

(Click to enlarge)

In the last article, I discussed the Risk Reward Matrix of the ZYX Change Method as applied to the ETF GLD. I also discussed the proprietary sentiment indicator that is part of the ZYX Change Method.

Regarding the silver ETF SLV, I stated that the analysis on GLD should not be interpolated to SLV.

In this article I will discuss another aspect of the ZYX Change Method – the Five Stages of Change.

For the readers who want to consistently make money on gold and silver while minimizing the risks, I highly recommend first reading my previous articles on Seeking Alpha on precious metals. Here are the links:

Those members of the Flat Earth Society who continue to claim in their comments that I consistently get lucky instead of understanding the ZYX Change Method that can help them generate high risk adjusted returns may consider reading every one of my well over 100 published calls and then making a judgment in lieu of personal attacks.

The diagram shows the five stages through which most investments go through. Alpha in a layman’s language simply means additional return in excess of the compensation for the risk borne.

(Click to enlarge)

From a short-term perspective, SLV is in the fifth stage marked "Crowded Trade." It does not mean that SLV cannot go up from here; it simply means that the risk in SLV is much higher than the potential return.

A "Crowded Trade" means that almost everyone who is likely to buy has already bought it and barring any unforeseen development, major new buyers are not likely. In this stage buying typically comes from the less sophisticated existing owners adding to their existing positions. In this stage, selling comes from the smart money.

In the "Crowded Trade" stage risk is very high because if there is a downturn, the existing owners are not able to keep on buying because of their already large positions relative to their account sizes. As the smart money exits even faster, those with positions larger than warranted panic and start dumping.

GLD for the short-term is in the stage marked "Hype: Latecomers Pour In."

If Bernanke in Jackson Hole disappoints gold bugs, the Quantitative Screen of the ZYX Change Method shows a fair value of gold at $1613 and of silver at $34-37. On the other hand, Jackson Hole also holds the potential of starting a new long cycle or a new short cycle.

At The Arora Report, our models re-compute the fair value every time data changes. What Bernanke says at Jackson Hole will be the next major data point. The information on new computations on both gold and silver, the long or short direction of the trade along with the best ETFs to trade based on Bernanke speech will be provided on the Real Time Feeds to the subscribers if all six screens of the ZYX Change Method are met.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I have no position in gold, but am inclined to buy gold when risk reward is favorable. At such time I will also provide a signal to my subscribers in real-time. I have sold short silver futures. Please see this position in the context of ZYX Change Method Trade Management Guidelines. On debt ceiling agreement I had sold short SLV at $40.02 and $40.78. That SLV position was closed at $37.82 on August 4, 2011.