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In these volatile gold
price days, you need to learn to think like a trader, even if you are a
small-time physical gold buyer holding on until the financial world implodes.
I didn't say "become" a trader. Learning how big traders
think and play the game will at least help you make sense of the things
beyond your control. Many gold speculators are either perma-bulls,
perma-bears, cynics, bingers, purgers,
dreamers, blasphemers, market shorts or market longs. A good trader is the right
mix of all of these things; he never squawks about the price action on a
single day basis.
In a long term up-trend with a tight
day-to-day trading range, a good trader can and DOES take profit along the
way. Such is an ideal market for a TRADER. Traders like an ESTABLISHED TREND
with channels that are wide enough to make a decent profit but limited in
surprises as reflected in the volatility. If the channel is too narrow, his
transaction costs (if he intelligently hedges his upside/downside risks) are
an appreciable percentage of the maximum profit he can squeeze out of the
market. He can make more money if he flies without a parachute by not
hedging, but a smart trader always packs his own before takeoff. In fact,
total costs can exceed his maximum potential profit; who wants to play with
that mess? A smart trader is scared of excess volatility. So he respects it.
Unfortunately, we are approaching the scary part of the gold price curve
where more and more amateurs (and even some less savvy pros) will be
destroyed before they get properly scared. Most of the techniques that many
currently trust in will be their undoing. One thing I have noticed in the
past two or three years is the increase in amateurs who think they have
graduated to the professional ranks after only one semester in the "real
world". I see these "players" all the time as I anonymously
skulk the financial and gold bug chat rooms and news groups.
Most of us have seen all the discussion
regarding bias and conflict of interest with regards to investment advisors
and stockbrokerage recommendations. Clearly problems occurred in the past
with the "always buy, never sell" recommendations. They never met a
stock they didn't like. "This stock is a GREAT buy at 20 bucks because
it used to be 40 bucks!" Or, "this puppy is up 100%, don't miss
out, she's got plenty of room to go up from here…think of all the money you
lost not buying her a while back…" Of course we are too smart for
that nonsense. We've been around. Only fools would
be duped by such biased nonsense. Let's see, to be a pro, and snatch all of
that cash from the turkeys in line for plucking, all we have to do is:
- Buy a subscription to the Wall Street Journal
- For good measure, throw in a subscription to
Investors Business Daily
- Get a couple of guru newsletters
- Pick up one or two books on stock trading at
the library or bookstore
- Turn on CNN and plop the TV right on the desk
alongside the computer
- Bookmark all those gold, silver, trading, and
financial news websites
- Ignore everything written by the web dudes we
either don't like or disagree with
- Send off two box tops and $29 for one of those
slick little TRADING secrets CD's with real time data analysis and
customized, versatile, buy & sell signal generators.
Now, piece by piece we acquire our battle
tools, tucking them away one at a time in the small room across the hall from
the bathroom. Now, with everything collected, we sneak down the hallway. Our
eyes dart left, then right to see if anyone is watching. We quietly slip
through the opening undetected by mere mortals. A brilliant blue-white flash
of light is seen from the crack beneath the door. A New York minute later a
towering figure appears in a burst of smoke and thunder. As the smoke clears
we see an impressive figure with a brilliant red " T
" emblazoned upon his chest. A trumpet blares deafeningly...TOOT TO DO
TOOT TA TA TA DAHHHH.
Look, it's a bird-brain, it's a plain-vanilla speculator…No, wait, it's
"TRADING MAN"! He loses his money faster than a speeding bullet,
more hard-headed than a locomotive, and able to leap over tall obstacles with
a single mouse-click….
Profitable trading has never been easy; along
the scary part of the gold price curve it will only grow much more
difficult. Here is simple question with an even simpler answer: Why do you
think that many trading houses offer free software and how-to guides? After
so much flak and negative publicity, increased regulation and scrutiny, not
to mention tight trading ranges and long-time-sideways-market malaise,
trading fee generated revenue has declined considerably. Volumes are up a bit
now with the post-Bush bounce (higher than I expected) but doomed. If I give
you a free guide, lovely little examples of how much you "could have
made" using these techniques, and software that helps you make real time
buy & sell decisions (along with opening a trading account, of course),
several things will happen: The financial industry will get less flak and
negative publicity about biased research and recommendations that have
conflict of interest written all over them. I just gave you free tools
incorporating standard TA principles and techniques that are in all the
textbooks. No charge. No recommendation. The trader uses these tools to study
whatever little market that tickles his fancy. We didn't tell him what to
buy. He told himself. IF YOU THINK YOU ARE
SMARTER THAN YOU REALLY ARE, YOU WILL TRADE MORE THAN YOU SHOULD AND YOU WILL
LOSE MORE THAN YOU SHOULD. THE TRADING HOUSE WILL RESTORE A SIGNIFICANT
PORTION OF THE LOST REVENUE.
A smart trader always sells a good portion,
often all of his position, into price strength so he won't force the market
lower by dumping his position. This is of no concern for a small-fry because
he can't do much damage. Except maybe in some of the ultra small cap gold
junior/explorers where a single buy/sell trade of any meaningful size
will significantly goose or kill the price. It's OK that he doesn't hold
for the long term like many smaller mom and pop "retail"
investors who should do just that. He will ride the upward price slope
and sell at a profit even only a few days or weeks after he enters. He couldn't
care less what gold will do next year; he cares if he makes money this
week or this month after subtracting the entry fees required to intelligently
support his position in light of the existing risks. He will POCKET his
profit if he isn't greedy rather than fade it into the next trade. MANY
PROFESSIONAL TRADERS ALL OVER THE WORLD WHO ARE NOT PART OF ANY COLLECTIVE
SUPRESSION SCHEME ARE DOING THIS WITH GOLD RIGHT NOW. The net effect of many
good size wallets playing the same game does change the dynamics, often
adversely for the small investor who is long bullion and can't wait until all
the nefarious "manipulators" get their comeuppance.
A smart trader will then redeploy his working
capital again only when the time is right. He might be back in
tomorrow; it may be weeks or months. They don't get up and go to work in 8-10
hour slices like ordinary working stiffs thinking: "I gotta make some money today". The amateur pattern,
day and "prop" traders think they have to click "buy" in
the morning and click "sell in the evening" everyday. You
DON'T. The fact that there is good physical buying from "true believers'
is a blessing; it always sets the floor and minimizes the downside. You guys
step in on price dips (and you should) and guarantee he won't get in too much
trouble on the downside. You "only go long" guys subsidize your
enemies.
A smart trader will study carefully his next
market entry point and his target of choice, be it gold stocks, actual delivered
bullion, or by selling/writing or buying call/put options, etc. Smart traders
use the income from the silly, soon-to-expire-worthless options they sold to
YOU in order to cover the cost of hedging their bets. YOU pay for their
parachute. Again, in the scary part of the gold price curve, this will
get geometrically more dangerous. He may hedge his gold position with a
leveraged proportion play in the FOREX market either short/long US dollars.
The almost perfect inverse correlation between gold and the US dollar makes
it ideal for using it as a hedge; it's a trader's dream. The
"experts" who think that gold is just a commodity that rises or
falls with the post-monsoon third world harvest should pay attention here:
THIS ALMOST PERFECT INVERSE CORRELATION CAN ONLY EXIST IF GOLD IS A CURRENCY
AND NOT MERELY A COMMODITY.
Right now, and for the past few months, some
BIG players who love the all you can eat smorgasbord of casino playthings we
call the financial markets are losing their interest in playing the straight
FOREX markets. These boys gobble up "goodies" in 10 million dollar
chunks the same way you buy 10 more shares of Newmont. They have entered the
COMEX sandbox. The COMEX gold market was almost always settled for dollars
and not metal at expiration or exercise option. Many of the big boys who
formerly settled in cash as winners on their side of the long bet are
standing for delivery at the contract buy price. They don't necessarily have
to take the metal off the floor. It can stay in COMEX vaults and be
"theirs" after payment. They don't care about the
"traditional" nature of the candy store they are in; they are using
the COMEX to buy metal and take possession. It is a simple way to buy huge
chunks of gold at essentially single price points without chasing the price
higher. The whole pile has to be delivered to the winning (buying) longs at
the single contract price agreed upon weeks or months earlier. Most of the
physical purchase action used to occur on the LME. Not anymore. Do not
underestimate the significance of this, which is good for those long gold and intelligently selected gold shares.
Too much of this buying without "offsetting" paper shorts (which
will eventually become ineffective for price suppression) will literally
cause this market to IMPLODE. The COMEX will have to exploit all of the
"force majeure" loopholes in their bylaws and contracts with rule
and margin changes; maybe even halt or shut down this paper market. I assure
you that this is very likely if standing for delivery increases and
continues. When the dollar was worth something, taking cash dollars out at
COMEX contract settlement was convenient, simple, routine and standard
procedure. With US dollars becoming "more worthless" at the
present, demanding and taking real gold at the agreed price is becoming the
routine for some players. It simply CAN NOT continue for very long along the scary
part of the gold price curve.
Along the scary part of the gold price
curve you really only need a few things. What you can get, largely for
free, is the wisdom of a few great warriors who have many gold and silver
medals pinned to their bare chests. You know who they are: Sinclair, Russell,
McKenzie, Norcini, Puplava,
Wallenwein, Bond, etc. Individually they have their
disagreements, but digested together they are an encyclopedia
of market WISDOM. But the one thing you can't buy is the most important: THE
HEART OF A WARRIOR. Those who run for the hills every time gold takes a
dip have no such heart. The finest suit of armor is
worthless with Don Knotts inside. Decide what you
believe about the future of gold, and put your money where your head, heart
and mouth are. If you believe the curve is turning down and her run is done,
short the stink out of it. Be a man and step up to the plate. If you believe
the curve is turning up, buy real gold bullion coins, hold them safely in
your own possession and wait. Either way, only warriors die bravely in battle
and are spoken of fondly by their descendants. The rest die of boring old
age, far from the battle and are forgotten before they turn cold in the
boxcar of the long dirt nap. The cheapest thing you can buy is a full-length
mirror. Take a peek. Do you think you run with the big dogs, or are you still
eating puppy chow? To trade the scary part of the gold curve you need
ice water in your veins, an absolute conviction in your analysis regarding
future market behavior and self-discipline that
would shame a Ninja master.
Trust God For Everything.
Trust Governments For Nothing.
Trust Gold Somewhere In Between.
J. Kent Willis
J. Kent Willis is a Financial Advisor, Licensed
General Securities Representative and the President of AGAPI Financial, LLC.
He specializes in tangible assets, biblical faith-based investing seminars
and balanced life strategies. He has traded gold and silver since the mid
1970's and resides in Kentucky. He can be reached at jkentw2@aol.com..
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