Leonardo Da Vinci And Gold
Oct 25, 2011
- What is the definition of leverage? Seek the definition that makes you richer in the market, while chopping risk. How is that possible?
- The sentence, “He’s leveraged his position with this new information” is a description of leverage that is not borrowed money. If you invest 70% of your net worth in a few junior gold stocks at a single point in time, you may be correctly labelled as somebody trying to leverage your net worth position with a junior gold stock tool, even though you used no borrowed money to do it.
- There is a horrific misconception in the gold community that because the dollar is intrinsically worthless, therefore the amateur investor should make some sort of “charge of the light brigade” move into gold and related investments, with enormous blocks of their net worth, often at single points of price and time. Some borrowed against their homes in 2006, and bought junior gold stocks with the proceeds. Many have become bitter or severely depressed, emotionally.
- Unlike the actions of the general public in the 1990s general stock market, these gold community investor actions in 2005-2006 were not really greed-based. The bottom line in most cases was fear-based action; fear that the dollar and even the financial system were going “off the board” or at least “into the tank”.
- That fear is the root cause of the “great gold community blowout” that followed the highs of 2006, as gold soared from about $700 in 2006 to over $1900 in 2011, while junior gold stocks wallowed. While errors were made by investors, I don’t believe the analysis of the investors was incorrect, and what happened was an error of applying incorrect tactics to correct analysis.
- There have been moments in time where gold stocks have appeared set to vastly outperform gold bullion, on a long term basis. One of those moments happened into the highs of May 2006, another into the highs of 2008, and yet another into the recent spring highs that saw GDX flirt with “going parabolic”, before being dashed on the Europe crisis rocks.
- These moments in time carry much more significance that most investors realize, and it is critical to work to understand what was really happening at the time. Try to balance the fundamentals of these situations with what happened technically, rather than boarding just one ship or the other. Your analysis was far more correct than you are giving yourself credit for, but you simply applied the wrong tactics to “engage the dollar bug enemy”, in action on the gold stock battlefield.
- In 2008, investment banks and other OTC derivatives-laden entities were being taken over by the major commercial banks and government. Gold stocks were on the verge of going parabolic as gold traded just above $1000. That “near-parabola” was real, and no gold market investor can be faulted for believing the parabola was at hand, because it was. One after another, insurance companies, mortgage companies, and investment banks were taken over by either major commercial banks or by government.
- Lehman brothers was the single exception to that takeover rule, and that one situation shed light on just how massive the entire OTC derivatives garbage dump really is. If Lehman was bought out, instead of being left to implode, gold would have reached the $1920 highs far sooner, and far more violently than the manner in which it ultimately did climb to $1920.
- While Lehman imploded your parabolic plans, the fact is that the OTC derivatives contracts that were marked to model in 2009 have not gone away or “matured like bonds”. Blown OTCDs remain the rocket fuel that should eventually propel the price of gold many thousands of dollars an ounce higher.
- Ask yourself whether you think you got it “all wrong” in 2008, or whether the Lehman event simply showed you how big the OTC derivatives horror really is. Lehman was not a lone OTC derivatives wolf. There are far bigger OTC derivatives players who now would be in far more marked to market trouble than Lehman was, but because the contracts are marked to model, there is no transparency of the seriousness of the situation.
- There may be no transparency, but that doesn’t change the fact that the OTC derivatives are there. Nor does the lack of transparency change the fact that no amount of medium term economic growth can fix this situation. There is no fix.
- As an investor, it is important that you stay focused on price points of buy action in the gold market, rather than basing your buying and selling on analysis. There are much bigger landmines than Lehman that could implode, and you can’t predict these implosions in advance.
- It’s very hard for the average gold community investor to analyse the fundamental factors that could send gold “parabolic”, and separately compartmentalize your tactical actions. Focus as hard as you can on the mindset of the Asian investor, who seeks to buy gold at the lowest paper currency price possible, and has very little interest in selling large amounts of gold, regardless of any possible “Lehman Two” type of event that is projected by anyone. That’s a big emotional step, but it must be taken.
- Wealth is built in buying the highest quality assets at the lowest possible prices, not in projecting parabolas or tops in the ultimate asset. Gold doesn’t need a higher price to prove itself as the ultimate asset. Still, the OTC derivatives crisis not over, and is accelerating. Picture silver rising to say, $500 an ounce, and then crashing to $100, and then soaring to $700. Are you really prepared to analyse your way through this crisis with huge gobs of your net worth on the line, as gold stocks and silver go into a “free fall of free falls”?
- Expose yourself to the upside of gold and related items in this crisis, but understand that “surprise” is the single most important theme of this crisis. Focus on that word more than any other, if you are serious about getting richer. Make surprise, not prediction, your greatest market ally, because it is your greatest market reality.
- You were told that the Egyptian revolution was all about democracy. Now, just months later, you see a million members of the “Bin Laden fan club” marching in the streets chanting, “no democracy”, and waving pictures of Binny boy. It feels like the banksters and Gmen have tied Israel and the Mid-East to strings and are swinging them into each other, in a high stakes (for the citizens of both areas) game of war-mongering. Surprise is the theme of this crisis. Embrace surprise, and plan all your market actions around this theme, or you won’t be coming out the other side financially intact, if at all.
- Probably 5% of the gold community is capable of being 100% invested in gold and silver, and laughing your way through all surprises, from now until the end of your time on this planet. For the other 95% of you, separate your tactics from your crisis analysis, and focus on the theme of surprise. The analysis of the 5% can’t work to make the other 95% richer. It’s about who you are, not about where gold is going, but few understand, so few will get richer.
- Surprises are going to get bigger and “meaner”, as the crisis accelerates. Do not replace your preparation for surprise with attempts to analyse your way through a financial and (budding geo-political) hurricane. 95% of you are not the 5% who can endure any and all drawdowns and laugh, so therefore 95% of you need to have risk capital allocated to buy deep areas of the surprise zone, at all times, not just when your favourite analysts say it will or will not happen.
- Click this oil chart now. Look at the price soar! Whether you predicted oil would soar or thought it would tank really doesn’t matter, when it comes to tactics. Click this oil tactics chart now. The red HSR (horizontal support and resistance) lines are your “Surprise, it’s time to sell!” points, if you bought into the downside surprise zone. Price could reverse and blow out the lows at $75. Are you prepared to buy that surprise, if it happens? Or are you going to be wallowing in analysis? The only way to prepare yourself is to have risk capital available now, to manage these surprises when they occur.
- Never forget the power of marking OTC derivatives to market. The price of any asset can be plunged deep into the surprise zone at any time in this crisis, and likely will be, over and over again, for years, and perhaps decades, to come.
- Let me be very clear about what “space helmets on” means, in the market. There is an erroneous linking of the term, “space helmets on” with the term, “back up the truck”. I don’t back up trucks, ever, in the market. Backing up the truck refers to investing enormous amounts of risk capital at single points of price or time. “Space helmets on” refers to holding your existing positions for what could be a potentially parabolic type of move, rather than trading them out for small gains.
- Nobody in the gold community made an analytical error putting your space helmet on in 2006, 2008, the fall of 2010, or the spring of 2011. Gold stock parabolas were very possible at those points of time, as were price corrections. The error was made in plopping huge blocks of net worth into gold stock positions at those points of time, not in holding your ground. Have some pride in your analysis, but add the necessary tactical action to match it.
- Some of you just burned a good chunk of risk capital in your 10,000th attempt to top call the Dow in a dollar crisis. That capital could have been allocated to buy gold bullion, in the latest surprise zone. Click this gold bullion chart now. I’ve talked about how the head & shoulders pattern that appeared on gold between $680-$1033 looked like it was sculpted by Michaelangelo. Just as you walk up and down a staircase on stairs, not predictions, so you must operate in the gold market with a staircase of buy and sell action, rather than predictions. If Michaelangelo is rumoured to have created the gold bullion h&s pattern, I have surmised that perhaps it was Leonardo da Vinci who created the even greater staircase horizontal support and resistance lines you see on this chart! Look at support and resistance as art, because it is, if you really understand what the gold asset is. When the choice is between predicting what’s next for gold in the OTC derivatives zone, and looking at gold bullion art lines, and taking action there, the only question is, are you onside?
Oct 25, 2011
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