Last week’s drubbing taken by the precious metals illustrates why I almost always use stop-out points. We exited our gold positions and the gold/silver ratio trade with good profits, and limited our loss on silver in my untimely attempt to ‘bottom-pick’ the market.
In my last comments, I mentioned “luck” and “skill”. This time I would like to mention experience, which kept me on the sidelines last week. There is an old adage often bandied about by traders and one that I adhere to – ‘Don’t try to catch a falling knife’. The silver price last week was just that – a falling knife.
This week should be different. The leveraged players have been forced out of the precious metals and the euro. The dollar’s dead-cat bounce is probably over. Yet the dollar’s problems remain. So it is time to again start building a trading position, except for the gold/silver ratio.
We took a big profit last week on this trade of the gold/silver ratio that was initiated last summer. For now, I’m going to recommend letting this ratio settle down somewhat before entering another trade.
1) The position bought at $1,492.00 on April 26, 2011 was sold at $1502.50 on May 5, 2011, which was its stop-out point. Profit: $10.50 (updated 8 May 2011)
2) The position bought at $1,395.50 on March 15, 2011 was sold at $1490.00 on May 5, 2011, which was its stop-out point. Profit: $94.50 (updated 8 May 2011)
3) Buy one position at $1,485.00 or the first London fix over $1,498.00, whichever comes first. Stop-out point: sell at an intraday stop-out point if Comex spot gold trades at more than $16 below your purchase price. (updated 8 May 2011)
1) The position bought at $46.12 on May 2, 2011 was sold the same day at $45.77, which was its stop-out point. Loss: 35¢
2) Buy one position at $34.50 or on the first London fix or a Comex spot price close in New York above $36.45, whichever comes first. Stop-out point: sell at an intraday stop-out point if Comex spot silver trades at more than 55¢ below your purchase price. (updated 8 May 2011)
Comex options (options are high-risk and therefore not for everyone):
Long one July’11 Comex 55.00 silver call at $1.189, the April 26, 2011 Comex close.
Long one Dec’11 Comex 1500 gold call from $50.80, the February 1, 2011 Comex close.
Buy one Dec’11 Comex 1500 gold call at the market (I’ll use the May 9th closing price in New York for record keeping). The jump in volatility makes the long-dated silver calls expensive. Otherwise, I would be recommending buying Dec’11 40 calls.
Hold these calls without any stop-out point. (updated 8 May 2011)
Gold/Silver Ratio – On May 5, 2011, traders unwound at 40.9 their trade of the gold/silver ratio (i.e., they were long silver and short an equal dollar value of gold) from 67.4 on the June 11, 2010 close in New York. Profit: 26.5 ticks, or 39.3% (updated 8 May 2011)
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