Ski School: Gold Wipes Out
by Tom Dyson
June 14, 2006
I’ll never forget the first time I stood at the top of a mountain with skis on.
What terror.
Even though it was just a green run – the easiest on the mountain - the piste looked impossibly steep. I couldn’t believe they expected me to throw my body over the edge with boards of polished fiberglass attached to my feet.
As we traveled up the mountain on the chairlift, the other skiers in my party tried to teach me the basics. “Lean forward” they said. “Always lean forward. There’s nothing more important. If you lean back you’ll wipe out.”
Their advice was useless. I pushed myself over the lip, sat on the back of my skis and slid down the mountain out of control.
You see, leaning forward down a steep hill on skis goes against all our natural instincts. It feels reckless and stupid. And even though four experienced skiers had told me to, my body just wouldn’t let me.
Until you’ve overcome the fear of leaning forward, you can’t ski. It took me a whole day on the slopes – and a very bruised body – before I figured it out.
The same rules apply with speculation. You have to overcome your natural instincts before you can succeed.
Take yesterday’s action in the gold market. Gold fell $45. It’s the biggest one-day move I’ve ever seen. Bloomberg confirms it. They say – in percentage terms – gold hasn’t fallen this much in one day since January 1990.
Gold is now down $170 since its high one month ago.
Big sell offs create panic. If you own gold, you probably felt a shot in the stomach the moment you saw that red number. I know I did. My instinct told me to dump my position right there on the spot.
Wrong call.
You see, just like my experience on the mountain, natural instinct tells us to sell our position at a low price.
The opposite is true in bull markets. Our instinct tells us to follow the herd and buy into a rising market. It’s the easy trade... but the wrong trade. When everyone wants the same stock and they bid up the price, we want to be the ones selling it to them. When everyone is panicking, it’s the perfect time for us to buy.
Look at this email we received yesterday:
“What am I supposed to do with my gold holdings??? It's causing a great deal of friction in my marriage because my husband wants to sell and Steve says to hold on. How long does this agony endure”?
I understand how this reader feels, but I urge her not to panic. Bull markets correct - they have to. It’s how markets work. The weak hands get shaken out and their stock is passed to the strong hands.
Gold may sink even further tomorrow. Who knows? No one can predict where the correction will end. The key is, don’t let the market tell you what to do. Have a strategy and stick to it.
Here at DailyWealth, we believe gold is in a bull market that may last another decade. Our strategy is to hold our position until everyone is crazy about gold. It hasn’t happened yet. Not even close. No one talks about gold at dinner parties these days and the institutional money is still skeptical of the commodities boom.
We also know that, as the bull market matures, volatility will increase. We’ve seen this already. Two years ago, a five-dollar move in the gold price was exceptional. Nowadays, it’s normal.
We expect even more volatility in the future. This way, when gold falls $45 in one day, we know to lean forward on our skis and enjoy the ride...
Good investing,
Tom
