Read This If You Own Gold

 

                                                                  Read This If You Own Gold

If only it were easy to make and protect money. 

There appears to be a reversion to the thought that “buy and hold” works again.  In addition, more people are getting involved in trading and day trading, which is a concern because it usually happens at the end of a bull run.

It is interesting to see how behavior follows the direction of price.  You have heard me say in the past that everything follows price; our feelings, emotions, how we behave, how news media portrays the market, our opinions, etc.  Everything is a derivative of what the price direction is.

If the price goes up, then the news is positive.  If the price goes down, the news is negative; as well as emotions and opinions.     

I want to discuss gold.  Gold is in one of my three main strategies.  For those who are attempted to remind me that I really have four strategies, I discovered many years ago that the first three strategies alone were too intolerable to follow.  Therefore, I added a fourth to assist in implementing the first three. What’s funny is the fourth actually has lowered the overall return of the portfolio.  BUT it makes it easier for people to implement.

In any case, one of my strategies includes owning gold.  Those who own gold have been taken on a pretty emotional and painful ride for the past nine months. 

That got me to thinking, “Will gold’s correction be too painful to survive for people?”  One thought I have is, if a strategy works, but nobody is able or willing to follow it, is it truly an effective strategy?  The answer is no, it is not. 

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Strategies that only work in weekend workshops with a whole team of coaches, advisors and therapists around is not a strategy that you can hold for the long term. 

The image below is the Precious Metals Mining stock index (GDX).  The bottom red horizontal line was the GDX low in 2008.  This is when everything was imploding and going to zero.  At this time, GDX went to about $15.

The very top red line on the image below is when GDX hit its lifetime high of about $65, which was about two years ago. 

The two short, horizontal red lines right next to each other in the middle of the image below is the current resistance that GDX needs to get over.  They are the intraday and closing price of that resistance point, which is about $31.

So far, there have been five attempts to break that $31.  However, the five attempts have been unsuccessful. 

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The last line on the image above is a diagonal red line that is connecting the lows from June 26th until today.

The reason that I am showing GDX instead of gold is because if I’m right about gold bottoming on June 27th and GDX bottomed on June 26th, then that means moving forward for the next five to six years, precious metal mining stocks will outperform gold.  Not every week, month or quarter, but over that five to six year period, precious metal mining stocks will outperform gold.

However, none of this matters if the strategy is designed in a way that people cannot tolerate or implement it. 

As seen by the diagonal line trending up on the image above, there is some support.  Typically if people do not want to hold a sector, stock or asset class going into the weekend, it closes down on that Friday.  Although last week was a painful week for anything related to precious metals, it didn’t close down on Friday; it actually closed up about 1.5%.

So, what do we do if this is just too painful?  The first suggestion I have is, if owning the mining stock is too volatile for you, then move out of precious metal mining and move back into gold.  You can use a gold ETF to do that, and will have less volatility in your portfolio. 

If the market falls with precious metal mining, gold will still fall.  However, the volatility will be less.  Case in point: from September 2011 until the end of June of this year, precious metal mining stocks fell 67%, as measured by GDX.  However, gold only fell about 35%.  Clearly losing only 35% versus 67% is noticeable.

Another option is to just cut back the amount of money you have exposed to the sector.  By that I mean if you have $100,000 in GDX, and it is just getting too painful, sell 25% of it and keep that in cash, and wait until GDX breaks above $31. 

In a month, if it is still too painful, sell another 25% until it breaks above $31.  We are looking at a pretty strong resistance point on the image above.  Once it breaks above $31, it will continue to move up.

So, those are two options for you to survive this correction.  I would not suggest going 100% to cash because it is so hard to get back in; regardless of whether GDX or gold falls lower, or breaks back up. Being 100% out and then trying to figure out when to get back in is just too damn difficult.

I have been working on a probability indicator for gold for the last few months.  I have back-tested about a dozen different combinations of moving averages.  I am doing the same thing for gold to see which combination fits it best.  This will assist in determining when you should own gold in a high probability mode, or when you should step aside when it is in a low probability mode.

I think that I have hit on the best moving average combination and best index to measure it on.  This is currently being worked on now, and will most likely be shared with my customers sometime next week. 

My final thought for the week is, “If the economy cannot accelerate now, then when?”

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About five years ago we had Lehman collapse, money printing was introduced to the world, and interest rates were dropped to almost zero.  Since then, the U.S. economy has grown about 2% a year.  That type of low growth for an economy like the U.S. is not enough to bring back wages, jobs, etc.

So, if the economy is not going to accelerate over the next few quarters, then what is going to happen?  It’s a question we should all be asking.

Think about this: there has been $10 trillion printed by the entire major central banks around the world.  And there was only a 2% GDP growth in the largest economy?  We have historically low interest mortgage rates, and that is STILL not getting a 3% GDP growth. 

The U.S. has a booming housing sector; many places where the price has exceeded lifetime highs.  We also have a pretty cheap U.S. Dollar and record cash on corporate balance sheets.  We have dozens of companies that have tens of billions of dollars just sitting in cash.  And still the economy is not booming.  If not now, then when…and with what?

This is not a message that the “sky is falling”, but it gives you something to think about.  The misbehaviors of the past still have not been cleaned up. However, they eventually will be cleaned up.   

As mentioned earlier with regard to the gold correction, it may be painful, but there will be a light at the end of the tunnel.

Together, we are growing and protecting your wealth,

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