Contrarian Chronicles
Worried metals prices might fall? Be prepared
A bull market in gold and silver is a roller-coaster. If you get lightheaded at the first curve, you need to imagine a dizzying drop and have a plan to limit your exposure.
By Bill Fleckenstein
The markets for metals and metals stocks always have attracted a tremendous amount of motion. The recent roller-coaster action may have left some folks with positions in the metals and/or metals stocks queasy and questioning what to do. Being prepared for the large swings endemic to these markets, as well as keying into one's own psychology, is to my mind the best strategy for weathering the ride.
The wild action we have seen is part and parcel of what happens during a bull market in metals. (Editor’s note: Gold has moved nearly 60% since early 2001, silver 40%.) Along the way, the metals probably have attracted some hot money, and the metals stocks almost certainly have. (Editor’s note: Gold stocks are up 62% since early 2001; silver stocks are up more than 135%.) These Johnny-come-latelies are fun to have around while prices are going up, but you quickly can see how violent corrections can follow. For those folks to exit as soon as the stocks don't "act well" is not surprising. It is exactly these kinds of corrections that get people shaken out of bull markets.Money 2004.
Perhaps we could be on the verge of a correction in the metals. I don't know. What I do know is that, in a bullish climate, the market goes up in such a way that you can lose your position in the process.
Consider what a sell-off would mean to you
To guard against that, you continually should monitor your own psychology to try to anticipate potential problems like a violent correction before you're caught with a metals-stock position that is "too big." Folks who have gotten overexposed -- because they've been fortunate enough to own a bunch that's gone up a ton, making them nervous -- should contemplate what a decline would mean to them. They need to think ahead to what might happen should a setback occur and decide how to deal with it before it occurs. That is what risk management is all about.
Once a setback is under way, the tendency is to panic out and then wind up being left behind. It's also easy to get left behind when you overtrade your position. After you've been left behind, of course, it's very, very difficult to re-establish your position at higher prices. This is why I have positions below which I will not let myself go until such time as I think the idea has run its course. (In the case of the metals, I believe that is quite a ways into the future). I, personally, always keep a core position, because I am afraid of what might happen if I allow myself to trade too much.
Self-assess to self-protect
However, some people may have too much exposure. How do you know if your position is too large? Ask yourself how uptight you were about gold a week ago when Saddam was captured, or how you felt on Dec. 10 when the metals went up and the metals stocks went down. If this self-monitoring indicates a too-large position, my advice would be to lighten up at the next good opportunity. On the other hand, these white-knuckle sell-offs offer a chance to boost your exposure if you're underinvested.
To repeat, it's not possible to know when a correction is finished. But the action itself is illuminating because it shows what can happen when one gets a lot of company in an idea and some of that company is buying a particular security or market just because it's going up. Folks should know that this kind of violent action is going to occur from time to time.
The bull market in metals is going to be a long, torturous process, with plenty of violent price action in both directions. On any given day or in any given week, anything is possible, so forewarned is forearmed. Again, everyone must know what they own and why they own it, in order to best position themselves for riding out the inevitable selling squalls while keeping their positions intact.
One further caveat on the metals/metals stocks, and this is for folks who've acquired positions as an insurance policy, rather than for trading purposes: Some have wondered whether they should start trading in an attempt to avoid corrections. My response is no. You have this insurance policy to protect your wealth. You do not want to "let it lapse" by selling it and potentially risk getting left behind. If you are trading-oriented, feel clever and confident that you can trade around your core insurance policy, then do so. But not everyone can do the latter, as most people have trouble even doing the former (myself included), i.e., establishing a core position in the first place.
The perfect startup for this market
Finally, given how speculation has been sprouting everywhere, including the IPO market, my friend Fred Hickey and I recently mused that we should accommodate the current mood with a start-up of our very own. In this environment, we could raise tons of money by launching a business called Sino-Nano.VoIP. It would do voice-over IP based on nanotechnology and be based, of course, in Shanghai. Our proposed stock symbol is $B0 (i.e., dollar be zero), as we expect that an idea this stunning should be listed on the NYSE, and ultimately inducted into the S&P 500.
Never mind that the Fleck/Fred concept doesn't completely make sense. It's got all the right buzzwords. It's got a great name. And, as indiscriminate as today's buyers are, if there were a stock like that in existence today with nothing other than a business plan, my guess is that it would be sporting a multi-hundred-million-dollar market cap. Of course, that's measured in dollars potentially worth next to nothing down the road, which is exactly why such an offering would work. How much can we put you down for? |
