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“In
times like these, it helps to recall that there
have always been times like these.”-Paul Harvey
Everybody loves a bull market especially us
gold lovers. However, prices never go straight to the sky
as they must periodically pause and rest a little while
some of us take profits off the table from time to time.
Unless you have been a market watcher for several years,
the hourly and daily market volatility and noise can make
you crazy. We have some ideas for traders and investors
to by-pass these distracting things and remain focused on
gold’s big picture.
This gold chart showing periodic channel extremes
(circled) is quite typical of several market patterns; not
just gold. Like clockwork, in March and April, gold bounces
to the outer edges or extremes of the upward price channels.
Within each of those circled price
bounces note as we go forward in the rally, each succeeding
top was a little bit lower, patterning a tiny weakness in
rally price. Then we see our most recent circle price
for 2006 bounce from support and jump
up and out of the channel in a higher rally.
These conditions are showing us that as time
and price move forward and upward gold can get tired and
go flat as buying pressures tend to wane. A tiring market
is saying we simply ran out of gold buyers during that period
of time. Our time span from late winter in 2005 until the
following August caused anxious gold bugs to fret about
the market being over. Nothing could
be further from the truth! The assurance we have
that gold will continue to rally is those two channel lines.
Unless the bottom line is decisively broken with dropping
prices, gold remains within its rally boundaries and we
can be assured our gold rally shall continue.
I know of an old time trader and investor
in Chicago who has been trading his entire adult life and
primarily relies upon those two channel lines for his pricing
guidance. His attitude is to keep it simple and stick with
your plan. As long as prices are in the channel he sticks
with his trades permitting investments to progress naturally.
He founded one of the largest and well known futures brokerage
operations and regularly practices what he preaches to others.
With prices showing us distinctive patterns
within those circles we can determine
selling sessions are generally on time agreeing with the
calendar. Further close inspection can show us when
the first gold rally leg was completed. This phase one ran
from an April bottom in 2001 through the end of 2004. After
some corrective selling in 2005 we are now beginning the
second and more powerful phase of the many years’
gold rally. This is observed as price blew out and above
the top channel line in early 2006. Just as our rally seemed
to tire, prices exploded upward with new strength providing
confidence the buyers had returned.
Each spring headed for summer, gold moves
sideways and slightly upward on a bias, trading within a
continuous range. Each succeeding gold leg (we are now in
leg number two) will grow with buying power and intensity
as more new buyers enter the gold market. The first leg
is the stealth leg where very smart, hard core precious
metals analysts, traders and investors can recognize initiation
of a new rally. More importantly they immediately have the
nerve to put hard cash on the line and buy gold. The gold
investment group has been out of favor for several years
and memories are short. It takes a great deal of convincing
in an early bull run that our gold rally is for real.
Slowly but surely, much bigger investors including
the funds realize gold’s potential and cash arrives
at gold’s doorstep in ever faster and larger amounts.
You can detect this higher interest as daily trading ranges
move from $1-$3 up to $10-$15 range days. This is the kind
of new investment that created the jumping rally, forcing
gold’s price above the top channel line.
Admittedly, the price range between those
gold chart channel lines is a whopper. Seeing 100 points
of price between $450 to $550 before
the event is visually apparent is difficult to believe
and very hard to digest. It takes a clear conscious and
strong resolve to become a long gold buyer. Today, we are
within the next new circle period indicating gold is going
to sell and retreat. Precious metals aficionados are quite
attached to gold and never want to see any serious selling
in their favorite market. We must recognize however, that
periodic profit taking is both normal and desirable or how
else do we get our money out and earn some good bucks? Those
CNBC cheerleaders who scream buy and hold forever provide
great amusement but somewhere, sometime,
you have got to take profits or this whole business is just
a silly and very expensive exercise.
We are not saying you must be active day traders
or even weekly swing traders jumping in and out of gold
futures and stocks like a jumping jack. That is a game for
screen watching pros not the rest of us in this gold business.
Rather, we suggest dividing the year into two repetitive,
normal, substantial rallies. The first is August to Thanksgiving.
The second arrives late in December or early January continuing
through March. Buying and selling twice a year to participate
in those two main gold moves provides us with most of the
longer view upside moves. Can you buy, sell and trade gold
12 months a year? Yes, you can but in our view, gold investing
is a serious business requiring substantial investment and
therefore not a game. In our newsletter we offer short,
intermediate and longer term investments for all kinds of
investing styles. But, today, we are discussing what we
feel is the least risky gold idea while providing a strong
upside opportunity for the majority of gold market investors.
We prefer to use gold and silver stock call
options for shorter term trading which have proven very
effective for us providing handsome returns. If you can
technically track cash gold and its futures moves, you can
trade these options and earn 100% to 300% in 30 to 90 days.
The underlying stocks must only move a little to gain expansive
option leverage. These tools are for active traders. We
know of one trader-investor who maintains two gold brokerage
accounts. One is for his core holdings which are rarely
traded or sold. The second account is used for trading gold
and silver stock call options. In very active instances,
you might have a third futures brokerage account dedicated
to trading gold and silver futures
and options on either the Comex in New York or the CBOT
in Chicago.
Occasionally someone will e-mail and ask us
questions about shorting gold futures or stocks. While this
can be accomplished and you certainly can make money doing
it, we do not recommend shorting any market that has a long
term bull frame around it. Every once in awhile, in what
ought to be a selling period on the calendar, (like today
3-1-06) gold will produce a very nice rally move. Even with
proper stops, a shorting trade is just scrambling against
a rally headwind in our view. One of our very experienced
colleagues trades gold futures long twice per year on each
of those large semi-annual rallies. He is quick, smart,
experienced and rich. He has powerful instincts for entry
and exit dates and most often is very close to tops and
bottoms. While he trades and invests in
most all the gold products including stocks, options and
futures, to my knowledge he never, ever tries to short this
market. Considering he is a multi-millionaire and is a Senior
Vice President of a global investment bank, this should
tell us something about strategy.
We have another friend who is managing director
of a gold fund in Europe. I asked him recently if he was
able to sell any of his gold stocks before the latest market
downturn. He told me he elected not to sell anything, as
he expected this latest down period to move in more a pausing,
shallow, sideways pattern and felt it would be unforgivable
to be out if gold took off in a premature rally. Since his
fund owns many shares and several of the stocks are in junior
gold companies, we think his decision is a wise one. To
exit even ½ or a 1/3rd position in that many stocks
would, in some respects, be self defeating. Selling juniors
in big volume would virtually ensure bad exit fills and
possibly strong losses. So it depends upon your own situation.
Another consideration is taxes but that is best addressed
individually with accounting and perhaps tax legal advice.
In summary, we strongly encourage our readers
and gold investing friends to focus on the sections of time
which reoccur each year. The two semi-annual rallies could
conceivably change as gold receives more buying pressures
and the trading ranges for days, weeks and months grow more
intense. However, even under these circumstances gold investors
will exit with profits or losses as this is a normal part
of all markets. Smart investors plan several months in advance
and are skilled in using the calendar and time. After all
the talk and daily dust-ups, you can always count on high,
low, open and close. And when you are ready to exit in disappointment,
use those channel lines and work with the longer term weekly
and monthly charts to rule out daily charting blips which
could create mistakes.
In our opinion, the more successful
gold traders and investors allocate a partial portfolio
as being the long hold core group. These dollars stay invested
except for removing ½ for profits after a good rally;
or finally selling it all at the end of what we think will
be the longest and greatest gold market boom in modern times.
Roger Wiegand,
Editor, Trader Tracks
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