Insurance is supposed to both pay YOU for your loss,
and offer YOU protection against loss.
Buying and holding gold & gold stocks did neither...
In fact, if you failed to insure the one thing
you should have been insuring... you just gave
back three years of hard work, time, money and
effort.
Since our profit taking exit in March and transition
back to the "trading range" game... short term bonds, the
US Dollar, the S&P 500, and even the Mexican Peso have all
outperformed Gold and gold stocks as insurance.
Markets are dynamic, not static. You can not afford to
take static positions in dynamic markets.
If you do... you just experienced what happens.
You also can not afford to hold the wrong kind of insurance,
because if you do... you just experienced what happens.
This is not to say that you need to become a daytrader.
Nothing could be further from the truth. But, you must
stay aware of changing fundamentals and/or changing
risk:reward dynamics.
Trading is all about seizing discrepancies between
price and risk.
It's all about risk vs. reward.
It's not about predicting which direction
markets move, as much as it is about knowing when
people have moved in the wrong direction, or have failed
to move at all, when then should have.
It's about recognizing when the herd has piled into,
and then over-stayed their welcome in a trend whose
fundamentals have dramatically shifted - and then either
conservatively hedging that ramping risk, or for those
who are more aggressive - trading directly against that risk.
If one was already loaded into gold and gold stocks into
the parabolic rise in commodities this spring - just as the
17 Fed cuts came to an end, just as the global economy rolled
into recession, just as the Fed began to apply the brakes
to money supply...and perhaps most importantly for gold,
and commodity bulls - just as the "Shadow Banking System"
and their leveraged credit creation collapsed...
I have to ask you...
What did you think you were insuring by continuing
to hold gold?
Read that last sentence one more time, and think about it.
What did you really need to be insuring?
If you got that right...you got the trade right.
If you didn't...you got crushed.
Crushed, because you needed to be insuring, what you
incorrectly perceived to be your insurance.
You needed to be insuring your gold -- not holding it,
as insurance.
It's all mindset.
You can not continue to think inside the Kitco, Gold-Eagle,
Sinclairite permabull, pom pom waving, cheerleader box.
If you do... this will not be the last time
what just happened -- happens.
You've found out what happens when you "hold tight"
onto gold -- when it was your gold, and the volatility
in the gold market -- that you should have been insuring.
You should have been insuring all those gains we reaped
by seizing the August 2007, Yen-carry trade washout that
took the HUI down to the 280's.
You should have been insruing the gains we banked into
last fall, and then the second great buying opportunity
off the "back up the truck" correction in December,
that led to the profit taking exit in March off of our
$1,000 Gold, HUI 520, and US Dollar 72 targets.
That's what you should have been insuring.
Our primary insurance then became "the trading range."
And once again, that insurance -- paid us.
We didn't pay for that insurance - it paid us,
over, and over, and over again.
As did those shorts, and puts that we held from HUI 460-470
down to HUI 370-380, and then again to HUI 300-320 - where
we got paid once again by our insurance.
And now, as we cash in our well-timed insurance policy,
now... for the first time in a couple of years, we are
buying another type of insurance -- leveraged, dirt cheap,
pennies on the dollar - upside insurance.
We are finally buying the broken, battered, and beaten
down juniors & explorers.
Last Friday Rob McEwen the former CEO of GoldCorp was
interviewed in this widely circulated article...
freegoldventures.com
And we began buying a diverse basket of juniors and
explorers at pennies on the dollar. We've bought
stocks that were trading at $8, $10, even $12,
that are now trading for a little over a dollar.
We bought stocks that were trading for $3, $4, and $5
that are now under a buck. From Minefinders to Minera
Andes, from Richmont to Rubicon, from Freegold to US
Gold... we've picked up diverse, highly levered, longterm
upside "option" on the price of gold.
We snatched up Bear Creek on the cheap -- instead of
finding ourselves... up the creek (without a paddle).
All that future "upside" insurance, was just bought and paid for,
by house money from our "downside" insurance profits.
Our insurance profits that protected us from the
downside - have now offered us highly levered
protection to the upside.
...that's how and why you buy insurance.
We took the profits from the gains on our short & put
insurance, and we put 1/2 of those profits into our
junior and explorer basket.
We didn't take a 20-30%% stop-out haircut. And unfortunately,
if you read the goldbug boards, or followed the advice
of the permabull newsletters, and pundits... there
was no reason to stop out at HUI 420, at HUI 380, or
HUI 320, or HUI 300. Not at $900 gold, not at $850,
and not at $780. Because all the way down... they
called the immenent turn up, and called for bugs to
buy more.
Unfortunately, unless they sold at much higher levels,
(and since gold had not reached $2,000, let alone $5,000
very few sell/profit taking calls had ever been made)
most bugs didn't have the profits, or a real
insurance strategy in place that paid them profits
on gold's decline... as to be able to really seize
the opportunity of golds collapse.
Those that viewed gold as their insurance, instead of
the one thing they needed to be insuring...paid dearly.
What we are insuring right now by buying a basket of
dirt cheap juniors and explorers - is the longterm
upside to the price of gold.
We now have highly levered options on gold's upside,
with no time decay.
We now have much, much less exposure to gold and gold stocks
here in what we view as a high risk:low reward environment
for gold... but, with tremendous, leverage to any unexpected
upside in the price of gold, now bought at historic,
if not obscenely cheap prices.
That's how I buy insurance.
My insurance both pays me and protects me,
and it does so in both directions.
My insurance was bought in anticipation of risk,
not in reaction to it.
I am not any smarter than most people here.
I just quit drinking the Kool-Aid.
I learned via the school of hard knocks.
I learned there are no magic bullets, or "systems.".
I learned there are no short cuts.
I learned there is no substitute for hard work.
I refused to be a victim of Darwin, or my own DNA.
And I traded in my subscriptions to pom pom waving,
cheerleading rags - for "scouting reports."
The most profitable move I ever made,
was less cheerleades -- and more scouts.
I spend more time studying, and reading my opponent
(the opposite side of my trades) than I do reading,
and studying about my positions.
I spend more time thinking, reading, and studying
why I could be wrong vs. why I could be right.
It's 90% mindset and 10% knowledge, technique, and strategy.
You've all heard about the Pareto principle. You know...
the 80/20 rule...
It states that 20% of your efforts will give you 80%
of your results. That 20% of traders will reap 80% of
the rewards.
In the real world, I've found it to be a 90/10 rule.
90% will continue to be mesmerized by all the pom pom
waving and cheerleading. They'll spend 90% of their time
reading all the permabull rags. And 90% will continue
to be doomed by their own DNA.
I mentioned a while ago that gold bugs would soon
reach a crossroads... one where they would need to
choose whether they wanted to remain in the 90%, or
move into the 10%.
That time is near.
And the choice will be all yours.
The 10%, or the 90%?
Which will it be?
Have you drank enough Kool-Aid?
Are you ready to change?
Mo later,
S.O.T.B. |
