Gold stocks, buy and hold?
From the hundreds of traders/investors
I've met on the net these past few months, it appears to me that
the majority of them are suffering a very significant drawdown
on their gold stocks investments. That is because many of them
subscribe to the "buy and hold" concept: Gold is
in a bull market, and what lies ahead will make the Nasdaq bubble
look like child's play...you know, gold to $1500, silver to $50,
"to da moon" stuff. This article is not
intended to debate when and why gold will reach $1500, it is
not my forte to predict the future, therefore, I'll deal with
reality and now.
IP and CP
In my trading model, I have a simple tool to identify the current phase of the market, so that I can deal with them differently. As we know, markets do not go straight up or down. In fact, markets spend 80% of its time correcting and consolidating, and only perhaps 20% trending. I label them as IP for impulsive phase, and CP for corrective phase.
This is the $HUI chart going back to when the bull market started. And because everyone knows gold is in a bull market, therefore we buy and hold. Not me. As you can see, we have gone thru two CPs and two IPs, and we've been in a third CP for the past eighteen months. Yes, if you are one of those who bought within the past eighteen months, you are likely under water.
The ability to identify a CP from an IP helps us to maximize gain during an IP, and smaller short term profits during a CP, and never suffer a double digit drawdown, and worse yet, tying up our precious capital. These two very distinct phases of the market occur in all indexes, and stocks. The cube had a nice IP in 2003, but since been chopping up and down in a CP.
CCJ has been one hot stock as uranium is becoming a household word among the in crowd. We are currently in a CP, therefore, trade it, but don't hold until an IP is confirmed. A stock like this could drop like a rock if someone yells fire.
The impulsive phase
Going back to the $HUI, an IP was confirmed in July 2003, and by holding until a CP, we made maximum gain. No need to be cute, no need to trade in and out, just buy and hold and watch your profits grow. Yes, I do believe in buy and hold, when the time is right.
We loaded up with a basket of golden rockets, such as BGO.
The corrective phase
And while we wait for the IP, we trade the CP, using our proprietary (fancy word for homemade) buy and sell signals, scalping a few % here and there using ETFs and funds, so that we can put food on the table.
And that is exactly what we are doing right now, trading the ETFs and funds, until either a sell signal, at which time we must exit, profit or loss; or when an IP is confirmed, in which case, we load up the boat with golden rockets for maximum gain. Trading the swings of a CP requires precision, there is very little room for error, therefore ETFs and funds are preferred for simple management and execution. It is during an IP that easy money is made, providing if we sit tight.
Trading and investing is neither rocket science nor brain surgery, its deeper than that. But there is no need to make it more complex than it is. Most folks in the business approach it the wrong way, and that is trying to figure out the market, by forecasting and predicting. Markets are dynamic and subject to constant change, therefore, only need to be followed. Most importantly, keep it simple.