-- Posted Friday, 16 November 2007 | Digg This Article
| Source: GoldSeek.com
Please Note: The author is not a registered securities advisor
Please read the Disclaimer below if you have not already done so
(Excerpts from the November 2007 Issue of EGS Dated November 7, 2007)
Not standing in front of moving locomotive
As I begin this Issue, Gold has broken over $800 with its sights set firmly on the all time nominal high of $850. The price has risen 25% just from the August lows and the HUI Index is up 50%. COT data-watchers and chart readers alike have been confounded by the gold’s continued strength. The mid-cycle correction I anticipated failed to appear. Fears of rising food and fuel inflation are partly to blame. But the main culprit remains a crashing U.S. Dollar, spurred on by terrible third quarter results flowing from the big banks the realization that Housing sector is nowhere near a bottom. All this combined is causing many to question the health of America’s financial system.
What’s really noticeable lately is how the mainstream is really starting to see now what is at risk here. It’s no longer just the Doug Caseys (Crisis Investing) or Jim Puplavas (Financial Sense Online) of the world who are calling for the biggest economic setback since the Great Depression. I was amazed watching a pretty mainstream weekly debate program on PBS this past Sunday morning (McLaughlin). First topic off the top was concerns over the U.S. financial system, crashing banks and the dollar and runaway Gold prices.
One of the four debaters, one-time presidential candidate, Pat Buchanan, was actually bragging about how much gold he owned. Two of them were indeed asserting that the U.S. Financial system is at serious risk. It doesn’t pay to be bearish because the vast majority of the time, the market is moving up. It’s not good to cry wolf too often. Who’s to say after all, that the current market turbulence isn’t just like all the other half dozen or so minor pull backs over the past few years, only to lead to new highs within a few months?
Can you believe that? The public is finally starting to get it. The nasty truth is being exposed for all to see. The biggest debt bubble in history has burst and nothing can stop it from running its course. And Gold is working out to be about the best beneficiary - the proverbial safe haven after all.
To be sure, all the technical indicators are showing gold is over bought and the US Dollar Index is oversold. So I would be cautious about adding new positions going forward. See the charts above; notice how they have both moved all the way from the very bottoms of their respective trading channels, almost to the tops in just three months. That’s a long way to move in a very short time. We should expect to see sharp reversions to the mean without notice.
On the other hand, we don’t want to start under weighting gold too much yet because for one, it’s too early in the season - small caps and gold tend to do their best in Q1 or Q2. Second, gold is taking on a life of its own now, and we don’t want to stand in front of a moving locomotive. It seems to be suggesting it’s capable of a melt-up, something like what the Internet stocks did in 1999 to March 2000. We certainly don’t want to be jumping off and then back on that train at higher prices and higher risk.
So, if we don’t want to sell our gold stocks now, what other alternatives are there to mitigate risk?
Strategy #1: Proper positioning based on seasonality
For one, we should gradually stop buying as these charts approach the top of their channels. This is hard for people to do, because, the positive reinforcement they receive when they take profits encourages them to plunge right back into the market. If you are doing this and finding yourself fully invested by the time the seasonal high rolls around in the first or second quarter, you’re setting yourself up to give a good portion of it back. Second, or shall I say in the first place, you should discipline yourself to load up on your core gold positions during the seasonal lows, usually June through August, when there is less competition for these same stocks.
In fact, the time for preparing for risk, is well before that risk arrives, by deliberately using the seasonal cycle. Look at the charts of Goldcorp, Newmont, Barrick. They all bottomed in the summer, but not by coincidence. Use seasonal positioning as your first line of defense against risk.
But what can we do right now to mitigate risk, as it rises?
Strategy #2: Buy highly uncorrelated, leveraged assets
One thing you could do is to purchase modest amounts of some kind of highly “uncorrelated” assets - which move in the opposite direction of your gold stocks if the price of gold were to fall. Preferably, these would be also be leveraged, to take advantage of short, sharp selloffs, and to reduce the amount needed to devote to this “insurance” to offset the paper losses.
Two ways that come to mind are: 1. ETF’s and 2. (Put) Options. We illustrated two specific examples in balance of this article, with prices as of November 7th. Interestingly, on November 12, or a mere three trading days later, the ETF example we used (see the chart above) jumped by close to 9.5%. Three days later on November 15, a Put Option we mentioned rose by an amazing 66% in a single day! So in a very short time we are already seeing examples of the potential benefits of strategic hedging.
To purchase the entire November Issue which includes specifics about the hedging strategies we are referring to or learn more about EGS, visit: www.emerginggrowthstocks.ca.
ALSO IN THIS ISSUE:
· 3 New emerging Gold stock picks
· Updates on our high flying renewable energy picks
To order, visit our web site www.emerginggrowthstocks.ca and take the single-issue option for U.S. $15 + GST
Louis Paquette
Publisher
www.EmergingGrowthStocks.ca
EGS Copyright 2007 DISCLAIMER – Louis Paquette`s Emerging Growth Stocks is an independent publication committed to providing an objective analysis of the markets, focusing on the TSX-Venture Exchange and individual companies with substantial upside potential over the next six to twelve months. The information contained herein is believed to be accurate but this cannot be guaranteed. The analysis does not purport to be a complete study of securities mentioned herein, and readers are advised to discuss any related purchase or sale decisions with a registered securities broker. Companies featured in EGS are often at very early stages of development and can therefore subject to business failure, and are to be considered speculative and high risk in nature. Reports herein are for information purposes and are not solicitations to buy or sell any of the securities mentioned. The author may or may not hold a position (long or short) in the securities mentioned herein. This publication may not be reproduced without the expressed prior consent of the author. The author is not a registered securities advisor, and opinions expressed should not be considered as investment advice to buy or sell securities, but rather the author's opinion only.
-- Posted Friday, 16 November 2007 | Digg This Article | Source: GoldSeek.com
Gold breaks $800 - Managing Risk, Hedging Strategies for a Hot Market
