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A Surprising Move in the Gold Market

By Jeff Clark
Friday, September 7, 2007

The market gods are a cruel, cruel bunch.
 
They laid a short gold trade out in front of me like a fly fisherman dropping a caddis nymph right in front of a 24-inch brown trout. And I took the bait.
 
Gold stocks were the worst performers during the recent market correction. And gold bullion failed to rally when it clearly should have been viewed as a safe haven. So, it made perfect sense to advocate selling the sector, and even shorting positions as an aggressive trade. After all, if gold can't rally when the entire world is falling off a cliff, then it's destined for lower prices.
 
And that trade was destined to be scaled, filleted, and sautéed at the bottom of a frying pan.
 
S&A Short Report subscribers took a 5% loss on the trade yesterday as gold gapped sharply higher in early morning trading. But that doesn't make it a bad trade.
 
Successful traders measure the probability of success of a trade against the risk of a loss. Two weeks ago, the odds vastly favored the probability of a decline in gold and I wrote about it here. So, being short the gold market was a trade that made sense...
 
But it didn't work out.
 
As you can see from the following chart, gold broke out to the upside and now looks ready to move even higher...
 
 
S&A Short Report subscribers covered their short positions soon after the opening yesterday. And we took a small loss on the trade. But it still makes sense to risk 5% for the opportunity to make 20%, and if I was faced with the same situation today, I would make the exact same recommendation.
 
Taking losses is a part of trading. No one gets it 100% right. Heck, if you can do better than 50%, then you're doing quite well. So it's important to keep your losses small.
 
My short gold trade is an excellent example of a trade I got wrong. And I'll retreat to my foxhole for a few days before getting back into the battle.
 
But this is also a good example of the importance of recognizing when a trade goes against you and keeping losses to a minimum.
 
There's no pleasure in taking a 5% hit on a trade. But it leaves plenty of chips available for future hands when the cards are a bit more favorable. Which, from a trader's viewpoint, could be a few minutes from now.
 
Best regards and good trading,
 
Jeff Clark




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Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
Change
52-Wk
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%