The Moron Rule

This is just a brief post designed to inform our readers that we’re adding to our already substantial gold holdings here. Sentiment, technicals, positioning (the latest CoT report was a thing of beauty and it didn’t even reflect Wednesday’s plunge and the high-volume trading range of Thursday, whilst GLD recorded three days in a row of very high outflows) and the nice Bernanke head-fake (on high volume) all tell us that Wednesday marked a major bottom and if it didn’t that the downside risk is very limited. And of course the fundamentals are wildly bullish… We point out to particularly prudent investors that at-the-money put options on gold expiring at the end of March can be bought for approximately 1.5-2% of the current gold price: this strikes us as a relatively cheap way to insure oneself against the possibility of short-term apocalyptic scenarios (which in our opinion could manifest themselves only in the immediate future, given that not a single indicator points to the likelihood of sustained declines in the months to come), whilst retaining pretty much all of the long-term upside potential. We’re also grabbing some more coffee and sugar and we’ll continue to watch them like hawks (the real ones, not those of the Fed variety). In fact we have been planning for quite some time to write an article detailing our rationale for investing in sugar and we apologize for the delay, brought about by the quite hectic market action of the past couple of weeks.

We’ll leave silver alone for the time being, as its price action as well as some facts (very high open interest, less-than-stellar CoT, absence of large outflows from ETFs, tendency to outperform gold during period of economic turmoil, unconvincing technicals) make us less bullish (not bearish!) on it. We suspect it has a higher probability than gold of experiencing a final washout and/or a period of nothing/nowhere action with plenty of volatility.

Of course this should not be construed as investment advice, as careful white-shoe lawyers would say: we encourage our readers to always make their own decisions. We’d also like to remind them (and ourselves) the inherent dangers of buying in the absence of a well-defined uptrend (in fact the current short to medium term trend is down). The always-provocative Ed Seykota once dubbed the practice of increasing one’s position as price declines “The moron rule: just keep adding more-on”. If you do not wish to swell the already-large ranks of the morons who inhabit this beautiful rotating ball, remember that to be a successful contrarian means to only buy or sell at extremes and with proper position sizing, so that should the unlikely or even the unthinkable happen, you’ll not end up being killed by it.