Mom is giving me the silent treatment.
Three weeks ago, I talked her out of buying gold stocks. That looked like a smart move at the time. The gold sector fell nearly 5% within just a few days of that conversation. But rather than continuing lower, gold stocks reversed and exploded higher.
The sector is now at its highest level in three years.
The VanEck Vectors Gold Miners Fund (GDX) is up 7% in two weeks. All of mom’s friends are talking about how they plan to spend all the money they’re going to make during this gold rally. Mom just sits there quietly, smiling politely while seething with anger at her son.
“That’s okay,” I said as I left Mom my third voicemail message, “we’ve been through this before. And, just like last time, you’ll see things differently by the time you visit for Thanksgiving.”
The last time Mom wanted to buy gold stocks was way back in July of 2016. I remember it well because that was the first time in my entire career as a trader that I felt comfortable enough to actually short gold.
You see, I love gold. I own a bunch of it. I always try to buy it on dips. And, as I have argued for at least two decades, the price of gold will be much higher in the future than where it is today. So, it is a necessary investment for the long term.
In my trading account, though, none of that matters. I’m looking to profit off of short-term moves. And in July of 2016, the most obvious short-term trade I could make was to short gold.
At the time, the commercial traders (a.k.a. the smart money) were net-short 316,000 gold futures contracts. That was the largest short position in the 20 years I had been following the Commitment of Traders (COT) report. So, the smart money was betting – BIG TIME – on a decline in the price of gold.
This was happening while the price of gold was screaming higher. The public was rushing to get into gold at any price. Financial television talking heads were unanimously bullish on the metal. And then, Mom called me and wanted to buy gold stocks.
You could not have painted a more potentially bearish picture – from the contrarian perspective.
So I shorted gold. I placed a big bet that gold would be lower by Thanksgiving.
And, of course, as always seems to happen on big bets, the trade went the wrong way.
The gold rally continued higher into August. Commercial traders increased their net short position to 340,000 contracts. Mom stopped talking to me back then – just as she’s not speaking to me now.
But, I stuck with my short gold trade.
It wasn’t easy. Contrarian trades never are. When it seems like the entire world is moving in one direction, it is remarkably hard to run the other way.
But, those tend to be the most profitable trades. And, they also tend to be the most satisfying. They take you from one emotional extreme – where it feels like the entire world is against you and your Mom won’t even take your phone calls – to the other extreme, where you just smile silently and collect your profits.
Gold peaked in early August 2016. It fell nearly $200 per ounce by the end of November.
Right now, Mom is giving me the silent treatment – just like she did in 2016.
I can’t wait for Thanksgiving.
Best regards and good trading,
Today, a paid-up subscriber thanks Jeff for his “market musings”…
I’m a loyal subscriber, having learned over time that you are right way more often than not. This market has me quite nervous so I find I often trade out of your recommended trades too early to maximize profit, but almost always I walk away with 20–30%. Not the 50–100% you may ultimately bag, but I’m not complaining!
Your frequent musings on “the rubber band” have helped calm my responses to this market’s frequent turnings…
Yes, the rubber band bounced back after the 1987 crash; even after the 1929 crash! But I’m hoping to avoid a 50% or more downside stretch before the inevitable bounce back. At 63, I may not have time to recover from a major crash.
Some notable respected investors have recently been saying they are mostly exiting this market…
You’ve mentioned a number of times this year that you think we may already have seen the highs for this long running bull…
Thanks again for all of your excellent market musings! Cheers.
Have you ever made a “contrarian” trade that turned out profitable? Do you use your own “mom indicator”?
Let us know, along with any other trading stories, questions, or suggestions at [email protected].