first majestic silver

Riding the Golden Bull

February 11, 2002

First let me make the following disclaimers. Everyone must do his or her own due diligence. Nothing in this essay should be considered investment advice. I am long gold and silver in the mining shares, options on futures, as well as physical. I stand to make a considerable amount of profit from a rise in the price of gold and silver. I may change my perspectives and or take profit without having time to report said changes.

During the bear market in gold, it was a legitimate strategy to be a trader and as such one had to take regular income gains (when one could eke out a gain). During that time, yesterday (February 8th, 2002) would have been a classical time to sell. The rationale was to sell into rallies and wait for the inevitable and strong pullback. After selling, one could slowly build back ones' position. There were a few times when one built ones' position too soon and the astute trader liquidated and took a loss so as to replace his or her position at a lower value.

Aside: For those of you who wonder why precious metal traders seem to have an uncanny ability to forecast the pain coming in the broader stock markets … remember that they have lived a bear market in gold for over a decade and survived! (While most Wall Street pundits were simply "throwing darts" at tech stocks) … the precious metal traders recognize the beast!

Since November of 2000, there has been a "sea change" in methods. It started to become profitable to keep a core position at all times and only trade a portion. This was due to a growing belief that a new bull was emerging in the precious metals markets. There were many "fits and starts" in the gold market in 2001 but most everyone was able to significantly outperform the broader markets ... for the trader this was still largely short term gain.

January of 2002 (maybe even November of 2001) has marked the second stage of the gold bull. In this stage the mechanics of "trading" the gold market has changed. This is a time when "buy and hold" and "buy the dip" (the terms that became so popular in the broader stock market craze of the 90's) when taken together have become a profitable strategy. Please note that there is no contradiction in the logical sum of these terms (i.e. How can you buy the dips if you are holding?).

There are at least two ways to justify the terminology. First, new money may be allocated at the dips. Second (and I DO NOT advise this to anyone although I use it myself), one could decide on a fixed percentage (say 30 to 35%) of margin that one was willing to use. As the portfolio grows, new monies could be allocated "on the dips" while maintaining a moderate and fixed margin percentage rate. I digress. …

Now "buy and hold" and "buy the dip," sound easy and it is from an operational perspective. The problem is that you set yourself up for an emotional roller coaster ... especially when you are over-allocated in a single asset class (to whit gold in this context). The term "bull" market has been chosen well. The analogy that comes to my mind is the cowboy riding the bull in the rodeo ... the bull is continually trying to buck him off ... but the best strategy to achieve the objective (stay on till the "bell rings") is to hold on and ride the gyrations. History may show that Wednesday, February 6th 2002 was an example of the "bucking of the bull" (or a "head fake" as I called it that evening). We'll talk about the "ringing of the bell" in a minute.

Now about sell stops … there is no simple answer to this question. Some issues that relate to the question are:

1) What type of market you are in … the preceding discussion may apply;
2) Capital gains versus regular income gain tax issues;
3) Integrity of the market maker;
4) Ones' investment time horizon;
5) Available time for "babysitting" ones' position.
6) And perhaps many others.

I don't use them. I am now predisposed to taking capital gains versus regular income gains. I have adequate time to keep an eye on things as my computer is usually active and the distraction is minimal. I don't trust market makers and I think that we are in a gold bull. However, I do use mental stops that are determined based on market performance. With that said … if I had to be away for an extended period, I would definitely use sell stops and or reduce my exposure through sales. The percentage below market for placement of sell stops would be determined on an individual stock basis deduced from scrutinizing the trading pattern of said stock.

When does the "bell ring"? The bad news is that no one knows. The good news is that a twenty-year bear market in gold is unlikely to be followed by simply a 2-month, 14-month, or even 24-month bull market (depending on ones' interpretation we have been in a gold bull for roughly 2 months or 14 months). In November of 2000, I told some of my confidantes to expect the gold market to outperform the broader market for five years … so far so good. It is entirely possible that "the bell will not ring" until the precious metals are a daily topic of conversation in not only the media, but also in the conversations of the majority in their everyday life. If this is so, the golden bull is indeed in its' infancy.

It pains me to say so, but the biggest danger for the gold bulls is the potential for an orchestrated attempt by TPTB (through the use of a "sea change" announcement) to stem this current rally. There are a couple of reasons why I think this is unlikely. Even as arrogant as apparently they are, many of them must be concerned when they hear from Congress that Enron and Anderson executives may go to jail. The "light" that GATA (as well as Howe's landmark lawsuit) is bringing to the "questionable behavior" of the gold shorts has helped to make the concerns of TPTB real! Further, with the plethora of positive fundamentals in place for the gold bull (increased demand - Japanese etc, reduced mine supply, producer hedge reduction, volatility in currencies and stock markets worldwide, BB short positions, CB holdings becoming increasingly paper [i.e. questionable accounting methods for leasing and swapping], etc.), the temporary "stay" that they would achieve would be so short-lived that its merit must be considered in real doubt.

In closing I would like to share an idea that I heard recently that I thought was of some merit. We have all heard the cliché "don't put all your eggs in one basket" and we understand the corollary idea of diversification. However, it seems indisputable that if one wants to get rich (in the many senses of the word), one must in fact know when "to put all ones' eggs in a single basket" … consider when we choose our partner in life … is "riding the golden bull" yet another example?

A special thank you to "Fishbone" whose question prompted me to write this essay.

If by some quirk of fate, a serious global "player" reads these musings … the germ of an idea has come to me that may go a long way towards not only solving the "gold dilemma" but also may serve to stop the slide in the global economy … since $500B at minimum would be required (ROI would be significant), only the serious "player" need inquire.

China has only 2% of its Total Foreign Reserves in gold.
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