first majestic silver

Trading the Golden Bull

March 25, 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.

I made the following statement as part of a post to the Gold-Eagle forum in February this year ["This is the new bull ... he has finally become obvious. If you can't smell it, taste it, see it, feel it, and conceive it, then you can't ride it ... you may even get trampled."] PMtrader Feb 08, 2002.

In this and another brief essay to be titled "The Progression of the Golden Bull", I would like to add a little detail to this statement. This discussion will focus on some of the considerations of "trading the golden bull".

In an earlier essay entitled Riding the Golden Bull, I made the statement [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.] In this essay we will give a specific example of the tax ramifications of this latter strategy contrasted with a trading strategy, which leads to regular income gains.

Before proceeding, I would like to give credit to the original author of an idea that I introduced in Riding the Golden Bull. I said, [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?]

Well … a kind reader forwarded me the following information about this idea of sometimes putting all your eggs in one basket.

[Regarding eggs and baskets as noted in your essay "Riding the Golden Bull", the following is from Mark Twain's novel "The Tragedy of Pudd'nhead Wilson".

"Behold the fool saith, 'put not all thine eggs in one basket'--which is but a manner of saying, 'scatter your money and your attention'; but the wise man saith, 'put all your eggs in the one basket and--WATCH THAT BASKET.'"]

So with the preceding considerable preface, let's say you are lucky enough to have things come together in your life so that not only is there a bull market available (that has at least a one year potential), but that you are aware of its existence and have enough fortitude to ride the bull.

For concreteness, let's assume you have a $200K stake and that you ride this bull so as to take capital gains. Further suppose that you make 400% over a one-year period (this has certainly been done in the broader markets of the 90's and if anything is conservative). Then you made $800K and pay capital gains of 20% and walk away w/ $640K plus your original stake of $200K for a total of $840K.

Now let's say that instead you are trading this bull and you have to take regular income gains. Further, let's assume that you avoid the pitfalls of the wash sale rules when you have to take a loss (as is inevitably the case sometimes). Finally, assume a total of a 45% tax rate. How much would you have to have at the end of the year to net the same amount? Answer ... you would have to make about $1,165K, which does not include your original $200K stake.

Thus, you would have to make an additional $365K over and above the $800K from the previous example ... or 365/800 which is about 45% more of your "capital gains" profit. Now I am sure that this can be done if your timing is near perfect. The problem is that your timing is never near perfect.

If you are trading a range, and find yourself in cash at the top and the bull breaks out, you will have to chase it or be left behind. This is a common loss scenario.

This latter is not intended as investment advice ... just the cold hard reality of trading a bull market. Sometimes no bull market exists so there is no option. The trick of course is not only to be able to find the bull ... but then be able to ride it without falling off and getting trampled.

Said another way as in a post I made in March of 2002, [I tell you now in no uncertain terms, that it is my considered belief that traders who try and get too cute with this bull market in gold are going to get trampled. How?

They are going to be short (maybe simply under invested) at a TA indicated point and the market is going to break against them. They will wait because they will not want to chase the bull ... and they will wait ... and they will wait ... and their trading gains will pale in comparison to the move that they will miss.] PMtrader, Mar 21, 2002.

I will be providing a detailed discussion about the current bullish channel in the XAU in a coming essay entitled "The Progression of the Golden Bull". The last two Friday closes (3/8/02 and 3/15/02) have confirmed the bottom of the channel. IF the XAU breaks this channel on the downside, then we may have to rethink our perspectives ... until then, we need only hold on and ride this bull for all that it is worth.

One astute poster ("Scruffy" at gold-eagle) warned the forum members about thinking oneself too smart because of large gains over the coming months or years in the gold sector (the implication being that it may cloud one's vision about an exit strategy). I considered this a very important observation … one that we must all keep in mind.

IMHO, the time is yet distant for this to be of monumental concern ... however, continually giving said idea frequent consideration will help steel one's resolve to do the right thing when the time is right.

Many have quipped (including myself) about the fundamental perspective that the "time" is near when your "neighbor" advises you about the best gold stock (or not an hour goes by where CNBC does not mention gold). However, it is my considered opinion that TA will play a crucial role in timing our exit in more concrete terms.

The world’s gold supply increases by 2,600 tons per year versus the U.S. steel production of 11,000 tons per hour.
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