Monday, May 2, 2011
Why Do You Need a Non-Leveraged Core Position in Precious Metals?
The answer to this rhetorical question is found in the market manipulation seen last night in silver. Those in the paper pits using leverage and short-term instruments to play the metals game can get wiped out in a flash. Trust me, I've got first hand experience. Read this post by Dave In Denver at the Golden Truth to get the gist of the most recent blatant "take down" in silver during thin overnight electronic market trading while many overseas markets were closed.
This is not tin foil hat conspiracy, this is how the casino works. The house has to always win, on balance. And when they don't, the government steps in and bails the house out with your purchasing power. It's sick and it's wrong and yet it's how the world works (and has for centuries). And no, it's not limited to the precious metals markets, but these are politically important to the status quo. "Gold is the enemy," at least according to Paul Volker and Alan Greenspan back before he became an integral part of the machine.
The point is that no one can shake that physical metal out of your hands by playing tricks with the paper price. I am not saying don't engage in trading (now THAT would be a case of the pot calling the kettle black!). Many of us are speculators because we live in a fiat world gone mad and there are few options left to protect purchasing power in this environment. Speculation always runs rampant in societies caught in the throes of a dying fiat currency. The decline of the American Empire is not unique or even special in this regard. Excessive debt associated with military imperialism - nothing new in that recipe! Does anyone actually believe that we will now reduce the number of troops in Afghanistan now that we have supposedly killed the Mythical Boogeyman? At least I think Osama bin Laden was the reason we started an undeclared war in Afghanistan (in true Orwellian fashion, it's getting harder and harder to remember exactly why Eurasia went to war with Oceania).
Anyhoo, make sure you have a solid core position in physical metal before you start throwing chips onto the electronic trading casino table. My metal of choice is Gold, but I own a little silver and I respect those who prefer silver, platinum and/or palladium. To me, Gold is the no-brainer, safe investment for the next several years. It has lower risk than other precious metals, but this means it has a lower potential reward. For most mortals, holding physical metal will yield greater gains than speculating on short-term price fluctuations in metals or metal stocks. Much like Las Vegas, the stories of those few who won big keep the moths coming back to the flame (including this not-humble-enough moth).
A series of significant margin hikes in silver coupled with an intentional smack down in its price during thin trading turned lucrative profits into margin calls for several retail traders last night. Wash. Rinse. Repeat. Don't play with dynamite unless you're ready to get blown up.
In the long run, last night's shenanigans will be nothing but a nearly imperceptible blip on a long-term chart of the bull market in silver. Those who got burned will look back and curse themselves for being so aggressive at such an overextended price point. Like the tortoise and the hare, 95% of the speculators (the hares) will be surpassed by physical metal owners (the tortoises) who are happy to just ride the bull at its own pace. And those who own paper metal as their core holding are also playing with a form of fire, as the rules of ETFs and ETNs are subject to change without notice and their counter party risk is increasing exponentially as this secular general equity and real estate bear market for the ages continues to grind onwards.
I still play poker with the sharks using a portion of my savings, but with a jaundiced eye and an itchy trigger finger that has learned to take losses quickly. I now watch the paper shenanigans with a mix of amusement and sadness. As a [temporary?] Goldbug, I know I have to be careful what I wish for in this environment. There are no easy ways out of the mess America and other "advanced" economies have created for themselves. Life will go on and people will survive, thrive and have fun in the mean time. Doomsday scenarios have no place in a serious investor's vision of the future, as investing is a waste of time if the "end" is near. I'm all for survival skills and being prepared for temporary chaos, but this to me is not investing (i.e. not really a financial topic).
Own physical metal if you are interested in the precious metals space. Once you have accumulated a comfortable "nest egg" in physical metal, whatever that means to you, then go ahead and speculate if that's your thing - whether it be via leverage, short-term paper trading and/or dabbling in junior metals stocks. There is plenty of money left to be made in the current secular Gold bull market, which promises to be one for the ages. Don't be the hog that gets slaughtered when it's so risk-free to be the bull that makes money.
Having said all this, I'm buying the freakin' dip tomorrow if silver goes down any further using the AGQ double bull paper silver ETF in my speculative account for a short-term trade...