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The Strange Irony of Investing

By Dr. Steve Sjuggerud
Thursday, May 18, 2006

Last week, it felt like the dot-com stock era all over again...

Only this time it was commodities... They just kept going up and up. Copper had almost tripled in the last 12 months. Zinc had doubled, and gold was the highest in 26 years. Oil reached an all-time high of $75 a barrel and silver broke above $15 an ounce.

It’s the strange irony of investing... When things seem the safest is often when they’re the most risky. This week, the markets are showing that risk.

This Monday, the CRB Commodities Index fell 2.7 percent, the largest decline since July 1988. Copper was down 9% at one point and gold had its biggest drop since 1993.

Silver’s had a rough time also... a couple of weeks ago, I read a sentiment survey where 97% of traders called themselves bullish on silver. Soon after that, the price of silver was decimated in a day... No joke, it went from $14 an ounce to $12 an ounce in a mater of minutes.

When I’m sizing up a new investment, I like to avoid that kind of optimism. It’s dangerous. We want the opposite...

In my monthly advisory True Wealth, we bought into German stocks at the right time about 18 months ago... when things looked really bad. Many local German investors felt things couldn’t get worse.

We’ve made great money there, safely, by investing the way we always do. When people thought it looked risky, it actually was very safe to buy... that’s when assets become incredibly cheap.

Now, German optimism is at 15-year highs. It’s no longer time to buy. It’s time to keep our eye on the exit door. Of course, we don’t want to sell now... big gains can be made from here. But we’re not buyers in Germany anymore.

Since we know where we are, we can formulate what we’ll do when the changes come... and change can come fast. Things can be serene one day, and crazy the next.

Up until last week, optimism in commodities was great, and the market kept hitting new highs. But when things went from “perfect” to “less than perfect” it got really bad...

Does this correction mean we have to change our investment strategy?

Absolutely not.

I believe there’s still plenty of room on the upside for commodities and we’ll ride our winners as high as we can. For example, Gold hit $720 last week... yet much of America is still not in the trade.

But should the freight train start to slow down, we’ll use our trailing stop strategy I’ve outlined many times in the past. This way, we’ll have no problem getting off.

This strategy allows us to participate in much more of the upside than any “rational” person would stick around for. And it gives us a cold, methodical way to get out.

So we’re going to continue to ride this asset boom, with our trailing stops in place.

Good Investing,


Market Notes


From precious metals to real estate to foreign stocks, DailyWealth is hard pressed to find an asset that hasn’t soared in the past few years. This broad rise in asset prices has seared a “Goldilocks” mentality into investors’ minds… with no one concerned about risk.

The lack of risk concern has shown up in super low levels of the VIX, one of our favorite measures of investor fear. A high VIX reading indicates investors are fearful. A low VIX reading indicates investors see blue skies ahead.

As today’s chart shows, the VIX is surging higher. Commodity markets are roiled and stock markets everywhere are declining. Goldilocks may be dead.

A big spike in the VIX (2-year chart):

-Brian Hunt

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