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Don't Bite The Gold Dust

Stewart Thomson
May 8, 2012
  1. Wikipedia tells you that gold dust refers to fine particles of gold that are produced by machining. They can also occur naturally. I agree.

  2. Please click here now. DUST-nyse is a triple-leveraged ETF that shorts GDX-nyse. I don’t think that shorting gold stocks has ever been as important to the gold community as it is now.

  3. Most investors try to use short positions to call tops in markets. Instead, I suggest you use them to manage your emotions in the lowest prices areas, as you accumulate your gold stocks. I refer to these prices areas as my “personal surprise zones”.

  4. If you look at this DUST chart over the past two months, you can see that the price has risen about 100%. Investors like to wait for a substantial correction in price before buying any asset. I don’t think that’s such a good idea in this case.

  5. If DUST was a mining company, I’d endorse that strategy, but it is not a mining company. It’s a leveraged bet against mining companies.

  6. I view DUST as emotional insurance, not financial insurance. Most investors never expected gold stock prices to fall to the levels they are at now, and many are emotionally shattered.

  7. A similar thing happened in 2008, but in 2008 you didn’t have an investment vehicle like DUST to help you navigate through your personal surprise zone. So, many investors sold out into those lows. Let’s not repeat that error in 2012.

  8. Buy only the amount of DUST required to kill the emotional urge to liquidate your gold stocks. You will be pleasantly surprised by how little stock is required.

  9. Let me use a key analogy to illustrate the importance of vehicles like DUST to the gold stock accumulator. Natural gas just rallied about 10%, but has been sinking for years. Companies are beginning to cut back on production.

  10. Still, it can take many years for prices to recover and for supply shortages to develop. I add small short positions in natural gas on small rallies like this one, while buying much bigger long positions into price weakness.

  11. I don’t do that because I think the price is going lower or to “call a turn”. It’s done because I’m continuing to accumulate the asset and I don’t know what my emotional condition will be at prices that could be much lower than where we are now.

  12. Don’t wait for a “big rally” before adding short positions. Professionally manage the risk that you sell a lot of your accumulated long positions in a moment of panic.

  13. What if GDX and your individual gold stocks keep falling here, before any rally of size occurs? It happened with natural gas. Small short positions are the main reason I’m still accumulating natural gas from an emotionally comfortable position.

  14. Leveraged traders often fully hedge their positions, by entering into short positions that are as large as their core long positions. I don't like full hedging or leverage. Unfortunately, financial drawdowns are part of the gold stocks game. You can’t avoid heavy drawdowns, but you can avoid capitulation.

  15. Look forward to adding DUST to your portfolio at even higher prices than where it is now, because you know it will be overwhelmed by your vastly bigger purchases of GDX, GDXJ, and individual gold stocks.

  16. Where are the big buying areas for GDX? Please click here now. HSR (horizontal support & resistance) sits in the $41-$42 area. It is defined by the highs that I’ve circled in blue on the left side of the chart.

  17. If GDX touches the $42 area I would suggest you add some DUST shares at the same time as you buy GDX and related individual issues, to help manage your emotional psyche if it doesn’t bottom there, but instead plummets to much lower prices.

  18. Has quantitative easing turned into your bridge on the river Kwai? Perhaps. One thing is for sure; it doesn’t really matter how much quantitative easing is coming if you have thrown in the gold stocks towel.

  19. Please click here now. You are looking at a 60 day chart of gold priced in Indian rupees. If you are wondering why the gold market feels somewhat “lifeless”, that chart explains the situation.

  20. In US dollars, the price of gold has been drifting lower. In rupees, it has been moving steadily higher. India’s gold dealers are not interested in paying up for their gold. They don’t have any “breakout” points on the chart.

  21. Most jewellers are well-stocked with gold. They have little interest in buying now. There has been a slight slippage in price over the past few days, but that is hardly what an Indian gold dealer is going to call a “big sale”.

  22. Please click here now. That’s the daily chart of gold priced in US dollars. Note the “lifeless” trading to the right of the chart. The Stochastics oscillator is trading in a similar fashion; wandering aimlessly.

  23. Western gold investors think the price is drifting lower, while Indian dealers think the price is soaring. Western investors, sadly, tend to sell price weakness, while Indian dealers do not buy price strength.

  24. Those two “liquidity flows forces” are at work now in the gold market, and the net result is a gold price that is drifting like a sailboat with no sail. This scenario will change. Stay focused on gold stock accumulation, but do it professionally. Don’t bite the dust. Buy the DUST!

May 8, 2012
Stewart Thomson
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