"We run carelessly to the precipice, after we have put up a façade to prevent ourselves from seeing it."
Gold and silver largely chopped sideways today with a slight downward bias, but nothing of real consequence.
There was a small amount of movement of gold out of the Scotia Mocatta warehouse on Friday. The report is shown below.
The way to play the precious metals market is to not take leveraged or timed (option) positions. Why is this?
Because the markets are being price manipulated, like the currency markets, LIBOR, base metals, and quite a few others it seems.
So what do we not do? We do not try to time the market, since the guys who are pushing prices around have the advantage of 'seeing our hands' given their market positioning and access to non-public information.
This means we are trading for the intermediate to long term. Daily price antics cannot affect us because we are not leveraged, and we are not holding things like options which have expirations.
I wanted to clarify this, because lately I have been getting some questions that make me think that some are trying to time this market, and pile into leveraged positions to maximize their outsized gains. That is not likely to work. The worst thing that can happen to a new trader is to hit a jackpot like that, because they will break themselves trying to regain the feeling of being fortune's child by playing long shots.
Convergence is a more likely way to play markets. That means that even though some things can get out of bounds and stay there for longer than we might think, eventually the fundamentals will come to bear and the markets will converge back to probability again.
In the case of gold, claims per ounce at these prices are at historic highs. The last two times this happened, we saw a major intermediate trend change within six months. Can it be nine months? Sure, why not? With regulators turning a blind eye and the Fed essentially handing the banks and trading desks $80 billion per month by buying their assets at non-market prices, things can go on for quite some time.
But eventually the fundamentals of supply, demand, and value will apply, and sometimes with a vengeance. We saw this in the financial crisis of 2008, wherein the mispricing of risk in Collateralized Debt Obligations blew up, and the housing bubble collapsed.
Sometimes that is what happens when trend becomes overextended. You can break yourself trying for the maximum profit and bragging rights, and miss the big move when it comes from sheer exhaustion.
So I think that is where we are with the precious metals, and with gold in particular. There are no sure things, but this one seems to be unfolding in a fairly classic manner. Try not to pig out and get sidelined before the time comes. As Bernard Baruch once said, better to lose the first ten percent of a major bull move than to try and get in early.
Now, you may not think we are going to see another leg up in precious metals. And you could be right. So what do you do? You sit out and wait for a clear breakout and confirmation. For those more aggressively inclined you take light positions with cool money and no leverage. And then sit and wait to be right.
I do not know how this will unfold exactly. But I do know one thing. All the pundits and master traders don't know any more than that either. But they will be glad to sell you their opinions, and hope that you do the natural human thing and remember the three times they were right, and forget about the six times that they were wrong. Most people certainly tend to keep score that way.
There are ways to get nearly perfect records in trading. But most of them are not available to the average, honest person.
Have a pleasant evening.