Commodities, Silver, and Shorting the Market
| by Daniel R., Homemade Investors Tuesday, August 26th, 2008 Is the Commodities Bull Market Over? It's been a wild ride for commodity traders this month. Gold, silver, and oil plunged, giving bulls an opportunity to get in at lower prices, while at the same time causing the masses to head for the hills, screaming that the great commodities bull market is over. Again. In fact, I remember something similar happening last August around this time. It turns out that big sell-offs are not uncommon, especially in August. This particular sell-off was predicted by several of the analysts I follow, although everyone seems to have underestimated its severity. Big selling events are normal and healthy during any secular (long-term) bull market. During the last secular bull market in stocks (1980-2000), panic selling occurred from time to time. Yet when you look at the long-term chart, these events are hardly noticeable. Take a look at the following chart of the S&P 500: |
When would you have sold during this bull market? Some of these sell-offs were terrifying to investors at the time, yet the long-term chart shows that investors who sold on these dips probably made a mistake. In secular bull markets, a good long-term strategy is to buy on the wipe-outs and hang on for the ride! At the moment we're in a secular bull market in commodities (gold, silver, oil, food, base metals, energy, etc) and a secular bear market in regular stocks. This is the reason I've been buying commodities and their stocks and shorting the broad stock market. When the commodity bull market is over several years from now, a secular bull market in stocks will likely begin. At that time, I'll sell my gold and silver and buy stocks. But that turning point is likely several years away. Until then, I'll continue accumulating on the big dips. If you want to learn more about secular bull and bear markets and how to navigate them, I'd highly recommend reading the following two articles by Brent Harmes: http://www.homemadeinvestors.com/08-05-14_three_phases_of_a_bull_market.html http://goldsilver.com/news_june_13_2006.php Although part of my portfolio is dedicated to these long-term buy and hold positions, the other part of my portfolio consists of shorter term trades. Although I enter and exit these trades on a regular basis, I will hold onto my long-term positions until this bull market reaches its climactic top. I just don't want anyone to think that I'm abandoning the sector when I mention that I took profits on something. That's what traders do. Why Silver Crashed Amid Widespread Shortages On Friday, August 15th, I sent an email to subscribers in which I spoke of silver's crash in the midst of widespread silver shortages. Here's a shortened version of the email: Many of you noticed that silver dropped to $12.50 at one point last night, which means that it lost about $1.50 in a couple of hours... Let me tell you what I think happened. Either one or a few big players (in conjunction) pushed the price of silver down in the futures markets. When this happens, stops are triggered and the price drops further, at which point the big players can pick up silver futures at much lower prices. It's a dirty, manipulative tactic, designed to rob the smaller speculators of their silver at cheaper prices. I remember that this same thing happened last August and was covered in detail by newsletter writers such as Ted Butler of www.InvestmentRarities.com. It's difficult to imagine how you can have a widespread [physical silver] shortage in the face of dropping prices. However, keep in mind that the vast majority of "silver" that's being traded out there is paper silver, which includes futures and the like. Supplies of real silver are extremely tight, and so these lower prices have very little to do with real silver, only the paper stuff (i.e. bets on silver.) ... It looks like I may have been correct in placing blame on a few big players in the silver futures market. None other than Ted Butler came out with an article entitled "The Smoking Gun" on Friday, in which he argued that two large banks had, in fact, entered into massive short positions in silver futures and forced silver substantially lower. An interesting follow-up to Mr Butler's article (by Gene Arensberg) can be seen here: Silver Investors Sucker Punched by Two U.S. Banks In short, this was not supply and demand in action or the free market working. If you lost money in silver (i.e. sold at a loss) over the past couple of weeks, then you're likely a victim of illegal scheming and market manipulation by two large U.S. banks. Unfortunately the names of these banks are protected by law, but perhaps they will be taken to task by the appropriate regulatory body, or perhaps a class-action lawsuit by angry silver speculators. All of this is an excellent reminder why it's generally better to buy the physical metal rather than dabbling in silver futures, options, margined accounts and the like. My coins and bars were not harmed during this whole thing. In fact, I've been adding to my physical silver holdings. Shorting the Market I shorted the Dow and the S&P on Friday via the DXD and SDS ultrashort ETFs. I placed stops just below their August lows. The stock market's recent rally is looking tired. Since we're in a bear market, it's only logical to expect the market to move lower after each rally. Yesterday, all market sectors I know of took a beating. This suggests that investors are exiting everything rather than just rotating from one sector to another. This bodes poorly for the market as a whole. I suspect that the fall season will be particularly nasty for U.S. stocks, and I'm expecting the market to make new lows. As always, I could be wrong about this. Keep in mind, though, that we're in a secular (and cyclical) bear market in U.S. stocks. Sometimes it's best to think about your investment strategy before the market forces you to. Just a thought. ****************************************** To sign up for our FREE EMAIL NEWSLETTER, visit our main page at http://www.HomemadeInvestors.com. Disclaimer: Homemade Investors is published by Homemade Investors LLC. The information contained in this article does not constitute personal investment advice and is not designed to meet the personal financial needs of any individual. Investors should seek advice from a qualified investment advisor before entering into any transaction. The information contained in this article is deemed reliable but is not guaranteed. The information and opinions contained in this article are subject to change without notice, and there is no obligation to update such. To republish this article, visit http://www.HomemadeInvestors.com/reprint for guidelines. © 2008 Homemade Investors LLC. All rights reserved. |
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