The Scary Part of the Gold
Price Curve
J. Kent Willis
AGAPI Financial
December 17, 2004
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 herethink 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, thrown 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 speculatorNo, 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, Mackenzie, 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
email: jkentw2@aol.com
December 17, 2004
AGAPI Financial
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. This work may be
reprinted and distributed freely to all hard money, "gold-bug"
and related websites provided credit is given to the author and
the website from which it was originally posted.
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