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Investing in the Gold Bull Market Like Jesse Livermore

Some ignorant and skittish commentators have been making outrageous claims about the gold "bubble" popping. But here at TDV Golden Trader, we are students of the Austrian Business Cycle Theory (ABCT) and have a deeper understanding of the real reason for the 10+ year bull market in gold - the radical devaluation of the worlds reserve currency - the pure fiat Federal Reserve Note (FRN).

Putting the last twelve months in perspective, we can clearly see the bullish move up from February to September. Since then, gold has been in a correction phase which may have ended in the last week of December when it tested $1550. From May through July, gold tested a price ceiling of $1550 three times before finally breaking through to make a strong advance to $1900. For the last four months, gold has corrected in a down channel back to the breakout price of $1550. This could very well be the support for a new run-up. During thinly traded markets, metal and stock prices are easily manipulated up or down, so it wasn't surprising to see both correcting hard to the downside, especially during the last two weeks of December.

$GOLD (Gold - Spot Price (EOD)) CME
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Since the last week of December, gold has made a strong move higher. It is now trading above the 200 Day Moving Average (DMA) of $1630. Last week we advised subscribers that when gold goes back up above $1600 and holds, we could see it continuing to trend higher. Gold is now testing a 50 DMA around $1675. The chances are that gold will be trading between $1675 and $1700 within the next two weeks before taking a break. This is where we expect to see some resistance and a round of selling from short term traders.

A strong advance past $1700 is certainly possible based on the fundamentals. On the other hand, we could be testing the top of a sideways trading range. In this case, gold would correct back to the lower end of the range and test the $1600 mark. One more corrective wave down is possible, but the longer that gold prices consolidate above support, the downside should be limited and short lived.

Looking at the price action of the mining stocks and silver since the start of the year, the HUI index is back above 500 and silver is trading between $28 - $30.

If you have traded gold and the mining companies long enough, you come to expect these kinds of selloffs. But once the corrections are finished, the rise in price that follows can be spectacular; it just takes a while to get going. A six to nine month corrective period is not uncommon, but it provides us time to search out the companies that performed well during the selloff, have strong fundamentals and are well capitalized. These are the ones we want to be focusing on for the next wave up in precious metals and mining stocks.


UNDERVALUATION IN THE JUNIOR, MID AND SENIOR PRODUCERS

While we are looking for junior gold companies that are undervalued, many of the midsize and senior producers also remain undervalued based on today's metal prices. The senior and midsized producers will continue to fluctuate with the metal prices but remember that the good juniors can provide exceptional returns.

For example, a junior explorer that we suggested owning since 2005 at $1.00 was trading around $4.50+ at the beginning of 2008. After the meltdown there was a significant selloff and by January, 2009, the company was trading around $0.60. That's a significant drop, but only if you sold your shares. If you followed our advice to buy and hold onto quality juniors, the same company came roaring back and by September 2011 was trading as high as $9.00. That's almost a 1400% return in less than three years from the low to the high.

We mention this because this correction will eventually end and we must be prepared if we want to capture similar types of returns in the next three to five years. All we have to do is find the right companies and stick with them for the duration of this bull market.


REGISTER YOUR SHARES

However, there is one very important thing to keep in mind. We are expecting massive financial chaos over the coming years, so for the stocks that you own for longer term holds (ie. not trading regularly), make sure you register your shares to protect them from being confiscated if/when your broker goes bankrupt or steals the funds, like what happened to tens of thousands of investors at MF Global. We recommend looking at the Special Report published by The Dollar Vigilante, called BulletProof Shares for anyone who owns stocks. To do otherwise is risking your entire portfolio. And I can imagine no worse fate than having an investor make 1,000%+ returns over the next few years, only to have it all disappear if his broker makes a bad bet on European sovereign debt. If you invest in stocks you absolutely must read the information contained at BulletProof Shares.


POSITIONING FOR THE YEARS AHEAD

Because, over the next few years, we will be provided with many good trading opportunities where we can easily make 20-50% on some of the stocks we follow and trade. However, the biggest gains will be made by holding on to the quality juniors for the duration of the bull market. If you "sit tight and be right" you can easily make 200% to 1000% returns.

The junior mining sector is probably the most volatile sector/industry to be speculating in, especially when hot money comes in and out of the sector. This is where you can literally make 1000% returns in a matter of a few years only to have the market take it all back during a correction. Not all juniors are equal, only the strong survive and with several thousand companies looking for minerals, you must find and stick with the winners to earn those kinds of returns. When it comes to investing in exploration companies, you cut your losers early and let your winners run. It's the same general strategy that Jesse Livermore, the world's most famous trader utilizes, when he said:

"It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I've known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine--that is, they made no real money out of it. Men who can both be right and sit tight are uncommon."

Jesse, of course, was always hopping in and out for trades along the way, but he was always long the core part of his position for the full extent of a bull market, as best as he could approximate it. That's exactly what we try to do here at TDV Golden Trader.

We hold a core position in gold bullion and a certain select gold stocks (that we register directly to reduce brokerage default risk). Barring any major changes in the outlook for these stocks, we intend to hold them for the duration of this bull market. And then we find trading opportunities to make quick gains buying and selling along the way.

If we do our jobs right, we'll make Jesse proud.

 

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