Saturday, November 13, 2010

Riding Bubbles

When I look at my quote screen these days, my eyes naturally move over towards gold.  Then silver.  And then to the other commodities.  The energy in the precious metals is building.  It has been building in the commodities, but the precious metals have had the longest uptrend and the most staying power.  It has the best story.  It is the theme of this market.  Currency devaluation and money printing.  The open interest in the COMEX Gold futures is the highest in history.  The genie is now out of the bottle.  The animal spirits are alive.  I cannot fathom it ending with a whimper.  The volatility coming out of silver is something special.  Are the Hunt Brothers pulling the strings again? 

I really haven't felt this way about something since crude oil in 2008.  This feels like a calmer, more stretched out version of the crude oil bubble.  I regret not being flexible enough to look beyond my specific niche.  This prevented me from being able to ride bubbles.

Riding bubbles doesn't come naturally.  We are naturally inclined to shy away from buying sharp uptrends and moves that are based more on momentum than fundamentals.  Bubbles do not come around often, but they are immensely profitable for those that can ignore the fundamentals, high prices, and can spot their end.  I realized this after piking around in the crude oil futures for a couple of dollars here and there.  I was missing the big picture.  Riding the big wave.  Crude oil had been in a long uptrend since 2002 and by 2008 was the highlight of financial news.  Fundamentally, crude oil over $100 seemed expensive so I was very careful when playing the long side.  I had to ignore the fundamentals but I didn't. 

Crude oil at $110 is similar to gold at $1400.  It is late in the game.  But it is well worth it to pay a higher price for the higher probability of a bubble forming.  There is a lot of upside left.  It will just come swiftly and that will be it.  The most likely time frame for the peak of the bubble is late January to early March.  Much like crude oil at $110 was entering the terminal stage of the bubble, gold is about to enter the same stage.

Pretty soon, after we get this little stock market correction out of the way, all lights will be flashing green for gold.  There will be nothing stopping it.   It will go up almost every day like the Nasdaq did from 4000 to 5000.  Like crude oil from 110 to 140.  It helps that the dollar is seasonally weak in December. 

I will know we are very close to the end of the bubble when the energy is manic, the buzz is deafening, and talks about a new paradigm emerge.  And when peripheral commodities start faltering and all the money only gets funneled to gold.  We are not there yet.

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