posted on 19 May 2016
from Daily Reckoning
-- this post authored by Michael Covel
Göran H., a reader from Sweden, recently sent me a note asking the following...
With gold's recent rally from $1,050 to over $1,250, I thought now would be a good time to address this question.
But before I answer, I want to warn you...
If you're a gold bug who thinks gold can only go up... well, I think you won't be too happy with what I have to say. But I tell it like it is. So let me start by telling you a little story...
A few years ago, around 2010 - 2011, when gold was making its big run up, I called Goldline.com.
At the time, they were running commercials on TV and radio nonstop, telling people they should buy gold coins - often marked up by a huge margin over the actual price of gold (they ended up in a government investigation and settlement).
So when I started talking to one of their salesmen on the phone, I asked the simple and straightforward question:
Their answer was pure comedy.
The salesperson said:
He said (drum roll, please):
I wonder if they called all their customers when gold started to crater in 2011. Please, don't get me wrong.
I'm all for buying physical gold as a way to diversify a portfolio and hedge against a possible collapse of our monetary system.
In fact, I recently had a call with my friend and legendary investor Jim Rogers. He told me he thinks that collapse is very possible. And as a Daily Reckoning reader, you probably know Jim Rickards has a similar thesis.
In many ways, buying and holding gold bars and coins might make perfect sense. It's very hard to trust currencies. And central banks can be damaging to say the least.
But holding physical gold as a wealth protection strategy is one thing. Speculating in gold ETFs and gold stocks is something completely different.
If you want to make money from trading gold and gold stocks, it makes no sense to "buy and hold."
In fact, buying and holding commodity investments may be one of the quickest ways to lose a fortune.
The Dumbest Strategy Ever?
Commodities are famous for their boom-and-bust cycles. It's really hard to make money if you're simply buying and holding, instead of trading.
Look what happened with gold stocks after 2011.
In 2011, when gold was trading at an all-time high, I warned many of my clients that just buying gold ETFs with no exit plan in place was a recipe for disaster.
I told my readers:
Instead of following the trend, most people just used the "buy and hope" strategy.
They bought and hoped gold stocks would continue to move higher - with no exit strategy. And that's why most people lost a lot of money. Something similar happened with silver.
When the Federal Reserve started printing money in 2009, silver started moving higher.
For the following two years, silver kept moving higher. A lot of investors thought the sky was the limit for silver - and that it had to go up.
At the time, one market commentator said:
And CNBC featured a money manager saying,
But in 2011, while everyone was dreaming about making a fortune in silver, the trend suddenly changed.
Most people, however, didn't have a strategy to sell when the trend turned.
People like Donna B., a 55-year-old retiree in Florida. She was so certain that silver would rise that she put 60% of her net worth in it.
When silver started moving lower in 2011, she said...
Another investor who lost money in silver said:
Here's the cold hard truth: the market doesn't care about what you, I, or any financial talking head "expert" thinks.
When it moves in one direction, you either get on board on the right side of the trend or you get killed. Guaranteed. That's life.
Is It Time to Jump Back In?
Do trend followers trade gold? Absolutely. When it is going up, they are long. When it is going down, they are short. They follow the trend.
That brings me to the question asked by Göran, one of my readers from Sweden. He wants to know how my proprietary system acted in 2011, and what's it saying today about gold stocks.
Let's take a look at the chart of GDX, the most popular gold miners ETF. To answer Göran's question, my system triggered a sell signal in late 2011.
Now let's jump forward to 2016...
A few weeks ago, one of my readers asked me if it was time to jump back into gold and gold stocks.
My answer was "we're close, but not yet." My answer of course wasn't based on what I thought gold would do next... It wasn't based on what I thought the Fed would do... Or on any kind of economic forecast.
To me, that's all useless information. Instead, my answer was based on the only piece of information you'll ever need in order to make money...
I'm talking about the price action. Two weeks ago, my system had not triggered a buy signal. But now we have a different story...
My system has just triggered a buy signal on both gold and gold stocks.
Why are gold and gold stocks finally rallying? Is it because China and Russia are buying massive amounts of gold? Is it because physical gold supplies are drying up? Or because investors are losing confidence in central banks?
Maybe all of these are true. But I don't know why exactly. And frankly, I couldn't care less.
All I know is that, based on the recent price action, this could be the beginning of a new long-term trend.
Einstein once said:
That's why trend following wins.
It filters out all the noise of the financial markets and focuses on the only thing that matters: trends.
In fact, you could make money from trend following even if you were on a desert island. All you would need is one piece of information: the price...
After such a big move recently, this could be the beginning of a major bull market in gold.
And when there's a bull market in mining stocks, you can really make a lot of money. A lot of money.
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