Friday, November 02, 2007

Bought A Little Silver

People are always asking me how I trade - how do I decide what to buy and sell.

Here's my answer:

How do you know how which football teams to bet on?

Obviously, you watch all the games, have been doing so for years, and may have even had some firsthand experience playing the sport yourself.

I have been watching the markets all day, everyday, for 12 years. I pretty much trade by feel, by the seat of my pants. Nevertheless, people are constantly asking me for coherent trade advice (though no one EVER takes it). Today I am just going to walk y'all through one little trade that I just made to provide a little window into my thinking.

This afternoon, I bought some silver - March delivery at a price of 14.66. As I type this it's up a bit from there, 20 cents higher.

I bought it primarily because gold is running past the $800 per ounce hurdle.

That's it. Nothing more complicated than that. If gold can set a multi-year high, it's not inconceivable that silver jumps 50 cents to make it's own "record-high" headline. These commodities generally move together. I bought a small amount in part because I already own a chunk of CDE, a silver mining concern and some NEM which is an unhedged gold and silver miner.

The long term chart of silver is pretty crazy. What it means...I have no idea.

The last couple of years silver has been a much better trading vehicle than gold - which seemingly just drifts up. A couple of weeks ago I dumped my long-held gold position around $765. I dumped it for no good reason. Alright, I guess a "margin call" is as good a reason as any to liquidate.

So this silver trade allows me to somewhat ride this strong gold market without actually repurchasing the yellow metal.

This is one of the nuances that most people don't understand. There are usually numerous ways to place a particular bet. For example, one might be buying solar panel stocks as a proxy bet on higher oil. You could also short the Euro if you think gold is going to drop but are reluctant to sell your bullion. Also, these days bonds and stocks are moving oppositely intraday. I have been playing them off each other almost everyday - shorting bonds as a proxy for buying stocks and vice versa. The possibilities and examples are endless (and evolving).

One just has to watch the game to get a feel for these relationships. This is why I encourage all unsatisfied sports gamblers to open a futures account (Interactive Brokers) and watch oil and gold, stocks and bonds, wheat and coffee through all their upticks and downticks. It won't be more than a few months before they start to feel comfortable and literate with commodities and futures - stuff that probably sounds highly esoteric at the moment.

Now what would make me bail on this little silver trade?

As yet, I don't really know. I am not one of these chartists who draws astrologically-inspired lines on a graph and comes up with a price trigger to dump the trade.

If gold makes a sharp intraday move down and silver hangs tough, perhaps I will get out quickly, count my blessings, and look for a lower re-entry point.

If gold keeps climbing and silver just sits here, perhaps I will buy some more.

If my account takes a beating elsewhere, I may have to adjudge my silver and gold exposure sufficient (via NEM and CDE) and unwind this last marginal purchase. Likewise if I make some dough on other trades I'll probably increase my risk appetite for this one.

My overriding trading philosophy, for better or worse, is always to trade small when I am losing, and really ramp it up when I have the wind at my back. And I doubt that is any different than how y'all bet on football and card games.

I'll update y'all on this trade when something changes.

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