Graceland Update–Stuart Thompson

This is just a reminder of why Gold, Silver, Oil, and other commodities are the items to store your wealth in or to build your wealth in over the coming years.  This is the latest issue of Graceland Update, a daily newsletter that I follow issued by an ex-Merril Lynch trader.  Enjoy.

A London Good Delivery bar, the standard for t...

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Oct 24, 2011

  1. Corn’s up. Wheat’s up. Soybeans are up. Silver is up. And, of course, the “Queen of the Crisis Scene”, her highness the Gold Punisher, is up as well this morning. Another week of failure begins, for millions of dollar bugs around the world.  On and on it goes, and where it stops, only the punisher knows.
  2. It turns out that the financial system didn’t close down after all, over the week-end, and those who lined up Friday to follow the top callers and sell all your gold for dollars because, “gold might fall down if the whole world starts rioting“…well, I have to wonder if substantial alcohol consumption late at night was involved in the creation of that analysis. “I’m here to sell all my gold because world rioting is about to start!” – New & improved dollar bug, Oct 21, 2011? “Sir, this is a bar, not a bullion bank, and you’ve definitely had your drinks limit“. – Head bartender, 1am, Oct 21.
  3. The Dow is now up 1500 points from the “it’s all over” lows of Dow 10,300. If you “must” short the Dow, for whatever reason, at least do it professionally. The lemmings in the gold community lined up to “get that Dow and make it pay”, after it fell 2000 points, after failing to short a tick of it as it rallied thousands of points, into 12,500.
  4. Click this Dow chart now to view the HSR (horizontal support/resistance) in play now on the Dow. Now is when the pro adds small shorts, after a 1500 point up move that blows team shorty pants away, not after a 2000 point tanking.Short when you know it can’t fall down, not when you know “it’s all over” for the Dow.
  5. Shorting the Dow for reasons other than managing a buy program or to manage emotional discomfort (sin by the amount required to kill the urge short-plop the Dow), is a total waste of risk capital, capital that could be used to accumulate gold bullion.
  6. On and on it goes, team “here’s what’s next in the crisis” making their grand statements, and then getting it all wrong. What’s next in the crisis is… surprise. Gold is how you manage surprise. Sadly, few understand. They think analysis is how you manage surprise. All crisis roads lead to the gold punisher. Learn the hard way, or the broke way. My suggestion is to choose the hard way.
  7. What’s the difference between the Greek Gman and the American Gman? Answer: The bigger they are, the harder they fall, but the longer they take before tumbling down.
  8. Leverage. Be sure you understand the definition of leverage, correctly. The comex gold contract is not leverage in and of itself. It is a contract for 100 ounces of gold. That’s what the contract is, a contract to buy or sell 100 ounces of gold, and it is the most liquid gold market in the world, and offers delivery of the bars, for those who want it.
  9. This morning gold is trading around $1650. 100 ounces of gold means that contract is worth $165,000 this morning. If YOU have a trading account with $200,000 in cash in it, and you buy 1 comex gold contract, you are not leveraged. If you have a trading account with any less than the current value of the contract ($165,000), and you buy the contract, then you ARE leveraged. End of story.
  10. If you buy $100,000 of NUGT in an account with $100,000 cash in it, the definition of whether you are leveraged or not is a little more complex. The item in play, NUGT/DUST is leveraged, but are YOU leveraged?
  11. The answer is: Yes you are, but your risk is limited to the amount you invest, whereas the investor who buys $100,000 of GDX with an account that has $33,000 could theoretically lose more money than they invest, if margin calls began, and continued. There are different types of risk that go with different types of leverage.
  12. One thing that should be very clear is that the investor who buys a comex contract with $165,000 in their account when the price is $1650 is taking on absolutely zero leverage, just as if they bought $165,000 of gold stock at a price of $1.65 a share, in an account that has at least $165,000 in cash in it.
  13. Click this GDX chart now. Notice the price at the start of the chart on the left, and the price now. GDX began at about $56 and it is now around $54. That’s a decline of about 3.6%.
  14. Now, click this NUGT chart now. Here you can see that the price started at about $32.50, and is now about $27.50. That’s a decline of about 15%. That’s more than double the 3.6% GDX decline, and the reason is “slippage”.
  15. NUGT and DUST portfolios are rebalanced daily. In a sideways market, there is a “wasting” of the investment, to a degree. Still, that wasting assumes a single investment at a single time point, not a pgen into the lows. Also, here’s a question: who ultimately emerges as the champion, is it the person who has an account with, say, 1 million dollars in it and they put that whole account in GDX? On Saturday, I asked you to compare that person to the person who buys $330,000 NUGT and holds $660,000 in cash.
  16. Today, I’ll take that a step further. Who is ultimately the champion, the person who puts all of a $1million acnt into GDX, or is the person who puts $330k into NUGT and $660k into….. gold bullion?
  17. If you want action, but also want to be realistic about the slippage issue with leveraged ETFs, my suggestion is that you use GDX for your core gold stock ETF positions, and NUGT for outer core/trading positions.
  18. If I personally had a gun to my head and the person with the gun said, “look you’ve got two choices, for the rest of your life, and choice A being to put all of your account into GDX, and choice B is to put 1/3 of the acnt in NUGT and 2/3 in bullion“, I’d have to go with choice B, because it is the less risky proposition. Gold bullion, ironically, is “only” 10 trillion times less risky than investing in the very companies that mine it!
  19. For most of you, a “choice C” of 1/3 GDX and 2/3 bullion makes the most sense, but understand that you can only really chop portfolio risk to the maximum if the foundation of your portfolio is gold bullion or items like silver or food that you are prepared to buy all the way to zero, or hold thru all drawdowns.
  20. Holding 2/3 bullion and 1/3 crap is infinitely less risky than holding 100% govt bonds. Bottom line risk is about the odds of the item going off the board, not about your price projections or “big plans” for the item.
  21. You could make 30% a year in govt bonds for generations, but if you never bought food or gold/silver, you could theoretically lose everything. Time in the market, in anything but true low risk items, increases your risk. Time builds paper gains in usury-related items. That’s increasing reward, but not reducing risk.
  22. Time invested in gold reduces risk, because over time, all “opposites to gold” are destroyed by gold. Many understand time and reward. Few understand time and risk.
  23. Some gold analysts have noted the speculative wasteland in the gold/silver COT reports. They argue that without the return of the leveraged speculator, gold can’t really mount a big rally against the dollar. A geo-political surprise could move gold, but leaving that aside, what I think you should focus on is just how strong gold is here in the $1500-$2000 zone, without the operations of the leveraged speculator.
  24. So far the theme of the week has to be, “gold doesn’t need any analysis crutch“. Wanting higher prices versus wanting more gold, is your primary decision at hand, at all times. As you get a stronger handle on just how powerful gold really is, you start to realize that your friends are those who accurately forecast lower prices, even though they don’t really understand gold.

 

Gridtime! The Indian mind looks to get more gold at lower gold prices, not more dollars at high gold prices. Risk in the West is viewed as risk of a decline in the gold price against the dollar. Risk in India is viewed as letting go of too much gold for paper currency, only to see gold resume it’s endless crushing of paper currency. That’s real risk, not missed reward, a concept foreign to the Western price chaser. Picture a 5000 year old crushing machine in operation, crushing dollars, Gmen, and Fudds. Do you really want to jump in there clutching a pile of dollars, screaming, “look at me, aren’t I great, the crusher was turned off for a few weeks, I predicted it, and I know I can get out of the crusher before it starts up again!”  Maybe you can, but my suggestion is to instead focus on understanding of the risk of dollar ownership,a risk that is totally separate from any single fundamental crisis event now in play. In the small picture, OTC derivatives are the trigger for current dollar risk. In the big picture, what the nature of government and empires are, and what gold is, is the backbone of what dollar risk really is.

Thanks!

     Cheers

St

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