Gold Getting Crushed – What Am I Doing?

After a spectacular decade of rising prices, gold is having a rough time in 2013. After QE infinity was announced in the fall of 2012, gold and gold stocks spiked, but soon after they continued their march south from the September 2011 gold peak.

As someone who’s owned gold since 2008 (I was a bit late), I have participated in an phenomenal trend. Not as good as those who bought in 2001 but still, not bad. I also owned other metals that performed magnificently. So how do I take the recent price drop in precious metals?

First off, Dr Copper has been declining for a while, as have other commodities, so a sell off in gold in silver shouldn’t be a surprise. And anyone with even a basic knowledge of charts could see terrible chart patterns developing. Second, the run up has been very strong and relentless increases draw in the greedy buyers – which works against prices because these folks tend to sell quicker when prices go against them.

Copper ETN (JJC) 6 month chart; Source: Yahoo Finance

The Bigger Picture

However, despite the price action, I still maintain my overall thesis. And that is that China and other rising countries would like their currencies to reach the “safe haven” status that the dollar, yen and euro have. And my thesis is that China will continue build their gold reserves (they buy all of their internal production and import too – and they are the world’s #1 producer), while continuing to sign currency agreements with other nations like Japan, Brazil, India and Russia. Eventually, China will offer a fully convertible, gold-backed currency and they will pay a good rate on their sovereign bonds. It does these countries no good when every time there is financial worry in the system, people sell out of their currencies and buy US dollar-denominated bonds.

If China and other nations do this, it could be terribly destabilizing for the dollar. And just ask the UK, these things can happen rather quickly. However, because historic changes in financial power do not happen overnight, we have to be careful.

Game Plan

I own gold and silver but I only trade the mining stocks. Recently, my attempts at trade entry have delivered a few (5 so far) small losses. And that’s because hitting support lines in prices can create a bounce or an entry point for short sellers. If the latter, you want to get out of the way, and out of the way quickly.

I have also tried a few times using options which is a much more risk-managed way to play mining stocks, and it is my preferred way. I also like buying the discovery stocks (very small exploration companies) if I am well aware of the assets and the price history of the company. it allows me to risk much fewer dollars with potentially the same payoff as a larger position in large mining company stocks. These in effect, are like perpetual options.

What if Gold Continues to Collapse?

I am fully prepared for a mid 1970s like decline in gold, and because of that, I don’t overdo it and buy on every dip. In fact I bought some recently (before Friday’s fall) but that was my first serious purchase since 2009. I may go accumulate a bit more after today’s fall. The funny thing is, I hope I never make too much money on gold, because if gold were to hit some of these very large price targets thrown out by serious gold bugs, it would likely mean that something very bad has happened. I’d rather make money in stocks but as an American, we have it in our blood not to trust government. Which is a good thing. And owning gold, in my opinion, is a little insurance against some types of government risk.

Stay safe out there…

Note: at the time of this article I own the following investments mentioned: gold, silver