Riding the Golden Bull

With the price of Gold less than 7% off of its six year high, I am amazed by how nervous more and more Investors or shall I say Gold traders are becoming. After a near perfect five year, Elliott wave Bull Market run, we had a near perfect Fibonachi 36% correction, which could have been enough of a pause had it not happened so fast. Two weeks was not time wise to correct five years. So now that we are approaching the one year anniversary of that $730 high, which would make it a 20% and most probably a sufficient correction enabling this Gold market to blast off into wave 3 of the this on going Bull Market there are more Bears than ever and that is extremely Good as every Bull Market must always climb a wall of worry and this market will be no different. Since so many of you seem to be wavering between whether you should become short term traders or stay as long term investors, perhaps a refresher course in making money and a little bit of hand holding may be the order of the day.

My early years as a Broker and Investor witnessed my attempt at mastering all aspects of this enormously complex and difficult field. of investment and/or trading. I studied everything I could get my hands on, especially all the books I could find on individuals who had amassed great fortunes trading. While a few succeeded by trading commodity futures; stock options, day trading or short selling. Jessi Livermore, the most famous of the short sellers who caught the top in 1929, nevertheless died broke. After a great deal of study and research it finally sunk in that most of them that achieved their ultimate goals were those individuals who identified a major Bull Market or an individual stock and RODE it for all it was worth. They bought and held during both the pleasurable upswings as well as through the sharp, terrifying down drafts, during which times they all took advantage of the down drafts to accumulate more stock. Then, when the Bull Market appeared to be in its final, frothy stage, they gradually sold their holdings to the late comers, who Joe Granville named them the Bag Holders, who's blind greed had them clamoring to get in at the top.. Most however held on to their positions and quite a few never sold and when they died everyone was surprised at just how truly rich they had become.

Throughout my early years, I felt that if anybody could achieve great profits from trading currencies, commodities, stocks or bonds, then certainly I should easily be able to join their ranks. After all, I was bright and not only loved the markets but thoroughly immersed myself in learning all I could about trading. In fact, although it was early in my adult life, investing had become my primary occupation. How could I lose, I thought? There was nobody smarter than me!

During this early period I spent many sleepless nights wondering if I had over-leveraged myself. I agonized if a correction was destined to deepen into a devastating Bear Market. I remember back in November and December 1974 pushing my clients and prospects to buy GM stock, then yielding 8.5% while I was buying 100 call options for myself, firmly convinced that we were at the end of the great Bear Market. I paid $1 each and sold them near their high at $10 several months later. What a rush! Alas, I also remember buying 100 silver futures contracts when silver was trading at $5.00 an ounce. Then, just prior to its amazing run the trade briefly sold silver off to below my $4.85 stop loss point and stopped me out, for a $75,000 loss. I was so sure of myself that I had over leveraged and my fear overcame my Greed and more importantly my resolve and pocket book.. I was left in the dust licking my wounds as I watched silver move higher and higher second guessing myself at every turn, if I should reacquire my position. I never did; As Silver soared to its eventual high of $52.50.Instead of making $100 million I had lost my nerve along with my $75,000 What was even worse: When silver passed $50 the COMEX officials first mandated that the margin requirements were to be raised to 100%, I knew then that the Writing was on the wall: and that the only way for Silver to go was down but I remained in a frozen state when it came to silver. When that did not slow the market to their satisfaction they mandated that the exchange would only accept liquidation orders. This forced the longs to sell as no new long buy orders could be entered. The result of this rule change was that silver plummeted! It went limit down for a number of weeks on end before it again resumed trading in the mid-$30 range. The longs, who earlier had amassed substantial profits, were then faced with staggering losses as they could not exit their trades. They were locked in! Each contract consisted of 5,000 ounces of silver. Thus, when silver fell from over $50 to below $40, the losses amounted to over $50,000 per contract. Numerous individuals went bankrupt overnight.

Will it ever happen again? You bet your life it will. So Keep a sharp eye out for that kind of action. It happened in sugar in the 70's, lumber in the 80's and most recently in Natural gas and was in reality the prime cause for Enron going bankrupt. However, when trading futures, recognize that one's losses are not limited to your margin that you put up.

Even though I KNEW that there was only one way for silver to go and that was down, I was so lacking in my resolve that I did nothing and lost my opportunity to make another $100 million on the way down. In the end, after trying for more than 20 years to trade with the pros, I lost most of my youthful naiveté but gained a lot of experience and wisdom.

I did an in depth review of both my successes and failures and the reasons for each of them. I especially concentrated on my losses. Slowly I came to realize and accept not only my strengths but more importantly my weaknesses. I finally admitted that I was an excellent analyst but not a very good trader and never would be. Simply because I was and am not disciplined enough, plus I was always slightly ahead of my time and I had been given the nick name Panasonic. While I've had more than my share of very successful trades, I have also had my share of losses which were also quite large and very painful. Furthermore, the agony that I often went through when a trade was going against me became more and more difficult to endure. On the other hand, I recognized that I had a great ability to perceive the emergence of a nascent Bull and or Bear Market. I realized that the times when I acted upon these correct observations, and bought and held my positions through the unfolding zigs and zags, and used the sharper sell-offs to add to my positions were the times that I most prospered. In the case of the silver trade described above I was correct on the trend, but I allowed myself to be tricked out of my contracts by my blind greed and cockiness which begat fear and complete lack of self control. I could have reinstated my positions at any time but I was frightened that once doing so, silver would again move lower and nail me with further losses. It didn't dawn on me that I could scale back in and increase my positions as I regained my confidence. So I would only make $5 million instead of $50 million. Unfortunately, this is all too often the result when competent investors succumb to greed and are overcome by fear and loss of confidence as they are seduced by the lust to over-trade.

Of course I did not immediately refrain from my trading proclivity! While intellectually I recognized that it was a mistake, emotionally, I continued to believe that I should be able to trade with the best. However, such interludes became increasingly less frequent as I slowly learned to protect myself from myself!

It is one thing to make a fortune trading but it is another to consistently do so. It takes a certain type of individual which I eventually admitted to myself that I was not disciplined enough and although at times I had nerves of steel, usually it was at the wrong times so I turned what should have been small losses unto mind shattering disasters.

There are very few people who have that required combination of these traits and abilities! Still fewer can successfully put them to use as a trader for them selves. In general a trader or broker, who like a lawyer or a doctor, takes care of himself (manages his own account), has a fool for a client. I am here to WARN you that the odds are heavily stacked against anyone who thinks they can successfully trade this gold Bull Market! Furthermore, the price that one must normally pay in sleepless nights and possible damage to one's health, not to mention financial losses, are typical attending elements that become part and parcel with a life of trading.

THE GOLDEN BULL

This brings me to the subject of gold. As long term readers know I am firmly convinced that we have entered a long term secular Bull Market in 2001. Moreover, I believe that we are presently still early in what, will be the largest Gold Bull Market ever. Additionally, given the various reasons for the emergence of gold's Bull Market, and the sequence of events that have transpired since its birth, I am confident that the Bull Market will not end for several years, at a minimum.

TRADERS vs INVESTORS

Should you be a trader or a long term Investor? Good question. How many of you that got into the gold market made a ton of money trading it from its $35 low in 1973 to its 1976 high of $200 had any profit left over when it suddenly dropped back to$100 in 1977? I'm willing to bet that not one of you got back in when gold soared passed $200 or passed $300 in 1978 and then just kept on climbing past $500 by the fall of 1979 ? BUT then after watching most of that Bull Market roll by most everyone began jumping in as gold gapped up as much as $30 a day into its ultimate high of $850+ into January 1980... Instead of reaping fortunes most traders ended up in the hole while those few slow dumb and not nearly so greedy investors who just grabbed on to that Golden Bull and hung on became very rich.

All of the same holds true for silver and Uranium markets.

In the case of futures contracts BE CAREFUL a person is not only liable for his committed margin funds, but also for all losses that may occur while he holds the contract.

There is nothing worse than being right and ending up broke.

The case for today is buying and holding gold bullion and gold equities, is primarily that you have the actions of their Bull Markets working in your favor. Yes, you will miss the excitement of trading, but you will also miss the loss of countless hours of sleep! True, you will experience periodic sharp reversals and breathtaking declines but these are buying opportunities and you must recognize them for what they are. WE are indeed in the BIGGEST of all Gold Bull Market and your asset base will inevitably work higher.

What you must remember from this discussion is that we are dealing in a confirmed Long Term Bull Market that over time will bestow great profits upon the true investor. The primary negative of trading this Bull Market is that the typical investor will too often find themselves having taken a small profit and be out of position when the major up-wave develops. And you will not have the discipline to get back in at higher prices.

During the great gold Bull Market of the 1970's, gold suffered a major secondary correction. This lasted from January 1, 1975, until July 4, 1976. During this period gold plummeted from $200 to $103 an ounce. Gold then surged to over $850 an ounce by January 1980. Then when the U.S. government announced that on January 1, 1980, Americans would once again be allowed to own Gold Bullion, all the investors that got in below $500 knew that the ball game was all over. On that fateful day, everyone who believed that a great influx of buying would result from the lifting of sanctions, were sadly mistaken. Rather than exploding higher, the last buyer had already spent his last dollar.. The end result was a harrowing, and trying, twenty year fall in the price.

In this as in every Bull Market there will be at least one such periodic, major price collapse. I can strongly recommend that if you sense that gold is encountering such a period, or that an external shock occurs that might precipitate such an event should occur, do not eliminate your positions. You can buy puts to protect yourself and in the case of a given gold equity, if the fortunes for that company negatively changes it is best to look for a re-placement to switch into but do not reduce your overall positions. Returning to buying and holding during a Bull Market the primary negatives are two-fold. First, is that it is boring! You will miss the excitement of trading! The second is that you risk being shaken out of the market during the inevitable sharp declines. But it is these declines that give you the opportunity to add to your positions.

I am convinced that all but the most sophisticated traders should ride them out. There is a common thread that appears during all Bull Markets. Many new traders are whipsawed out of their trading positions when gold drops sharply below support only to recover to near unchanged. Under these circumstances it can be quite difficult to reenter the trade.

EVERY BULL MARKET DOES WHAT EVER IT HAS TO DO TO MAKE THE MAJORITY OF TRADERS WRONG!

Often, as in the case of my earlier discussed silver futures experience, you will not have the courage to again make purchases before gold moves ever higher. This will force you to miss out on the profits that would have accrued if you had remained invested.

All Bull Markets have a tendency to move higher while carrying as few investors with them as possible. Gold Bull Markets are no different! If you allow yourself to be faked out of your position, by trying to be cute and trade the market prior to a major gold advance, it is not gold's fault if you miss the rise, it is yours! Just as in the bull market for stocks all through the 90's; buy the dips and holding on was the way to make the most money. So, just like riding a Brahma Bull, grab hold of your positions and hang on for dear life and make sure that, that Golden Bull does not buck you off.

GOOD LUCK AND GOD BLESS

Aubie Baltin CFA, CTA, CFP, Phd. (retired)
Palm Beach Gardens, FL
[email protected]
561-840-9767

30 April 2007

The above information has been gleaned from information that I believe to be reliable but is not guaranteed by me. The information provided is strictly for educational purposes and is not meant to be used as investment recommendations.