Friday, September 23, 2011

Silver and Gold, More Blood in the Streets

I was a little surprised to see silver and gold getting slaughtered again today. Technically speaking, precious metals in the short term are fundamentally broken. I've been reading various things all morning trying to find an explanation that makes sense. Here's the best summary I could find.

As I am writing this, gold is absolutely getting destroyed- down over 105. Silver is down over 15% in one day... very close to erasing all of the gains it has made for the entire year!

Some are claiming that other countries' currencies are getting marked down and this is having an adverse effect. Others think the chief cause may be forced liquidation and general selling simply because gold has been the best performing asset this year. Perhaps.

Personally, I think the big banks are stoking the fire and exaggerating losses. It's in their interests to do this. They are simply using non existent and worthless paper to drive down the non existent and worthless paper price of precious metals. All of this overdone selling reminds me of a story.

Years ago, I was short a company that still exists- called Fuel Tech. FTEK. I remember it well. They manufactured clean air technology for coal fired generators which was largely unspectacular. However, they asked spectacular prices for their product. There was a finite amount of consumers, competitors, and this stock was greatly over valued. I was short at 25 with puts also, and I valued the stock at 5 bucks. The earnings report was due. I knew it would miss. When it came and missed big, the stock shot up nearly 10 dollars! To this day, when I think of that bullshit, I get physically sick.

I had lost nearly 20k that day- on paper. I did not have 20k to lose. That was a full third of all of my capital. That night, unemotionally, I fought my way through this mess. Was I wrong? Fundamentally this stock was a fraud. I knew it. My only mistake was getting a little too greedy and taking a larger position in one equity than I should have. That night, I emotionally committed to the only thing I could do. The following few days, I shorted this thing even more, I increased my put buying. Eventually FTEK fell off the cliff like it should have. I got whole. I closed the books, shorted a few stocks from '06 to '07 and eventually just put my money in bonds. I have not traded equities since '07.

FTEK taught me a huge lesson about emotional stability. If you have done your homework, if the fundamentals for your position are still intact, then you have nothing to fear. Eventually you will be rewarded for your due diligence.

That is the position some of us find ourselves in right now. Fundamentally, nothing has changed. In fact, I could make a pretty good case that things have gotten worse. There may never be a better time to buy precious metals than the days that are here right now. Buy them, lock them up, and be patient.

1 comment:

Anonymous said...

Right on! Exactly what I did. I'm thinking silver bounces back to 40 by year end. Maybe sooner. We are on the precipise.