Leonardo Da Vinci and Gold

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  1. What is the definition of leverage? Seek the definition that makes you richer in the market, while chopping risk. How is that possible?
  2. The sentence, “He’s leveraged his position with this new information” is a description of leverage that is not borrowed money. If you invest 70% of your net worth in a few junior gold stocks at a single point in time, you may be correctly labelled as somebody trying to leverage your net worth position with a junior gold stock tool, even though you used no borrowed money to do it.
  3. There is a horrific misconception in the gold community that because the dollar is intrinsically worthless, therefore the amateur investor should make some sort of “charge of the light brigade” move into gold and related investments, with enormous blocks of their net worth, often at single points of price and time. Some borrowed against their homes in 2006, and bought junior gold stocks with the proceeds. Many have become bitter or severely depressed, emotionally.
  4. Unlike the actions of the general public in the 1990s general stock market, these gold community investor actions in 2005-2006 were not really greed-based. The bottom line in most cases was fear-based action; fear that the dollar and even the financial system were going “off the board” or at least “into the tank”.
  5. That fear is the root cause of the “great gold community blowout” that followed the highs of 2006, as gold soared from about $700 in 2006 to over $1900 in 2011, while junior gold stocks wallowed. While errors were made by investors, I don’t believe the analysis of the investors was incorrect, and what happened was an error of applying incorrect tactics to correct analysis.
  6. There have been moments in time where gold stocks have appeared set to vastly outperform gold bullion, on a long term basis. One of those moments happened into the highs of May 2006, another into the highs of 2008, and yet another into the recent spring highs that saw GDX flirt with “going parabolic”, before being dashed on the Europe crisis rocks.
  7. These moments in time carry much more significance that most investors realize, and it is critical to work to understand what was really happening at the time. Try to balance the fundamentals of these situations with what happened technically, rather than boarding just one ship or the other. Your analysis was far more correct than you are giving yourself credit for, but you simply applied the wrong tactics to “engage the dollar bug enemy”, in action on the gold stock battlefield.
  8. In 2008, investment banks and other OTC derivatives-laden entities were being taken over by the major commercial banks and government. Gold stocks were on the verge of going parabolic as gold traded just above $1000. That “near-parabola” was real, and no gold market investor can be faulted for believing the parabola was at hand, because it was. One after another, insurance companies, mortgage companies, and investment banks were taken over by either major commercial banks or by government.
  9. Lehman brothers was the single exception to that takeover rule, and that one situation shed light on just how massive the entire OTC derivatives garbage dump really is. If Lehman was bought out, instead of being left to implode, gold would have reached the $1920 highs far sooner, and far more violently than the manner in which it ultimately did climb to $1920.
  10. While Lehman imploded your parabolic plans, the fact is that the OTC derivatives contracts that were marked to model in 2009 have not gone away or “matured like bonds”. Blown OTCDs remain the rocket fuel that should eventually propel the price of gold many thousands of dollars an ounce higher.
  11. Ask yourself whether you think you got it “all wrong” in 2008, or whether the Lehman event simply showed you how big the OTC derivatives horror really is. Lehman was not a lone OTC derivatives wolf. There are far bigger OTC derivatives players who now would be in far more marked to market trouble than Lehman was, but because the contracts are marked to model, there is no transparency of the seriousness of the situation.
  12. There may be no transparency, but that doesn’t change the fact that the OTC derivatives are there. Nor does the lack of transparency change the fact that no amount of medium term economic growth can fix this situation. There is no fix.
  13. As an investor, it is important that you stay focused on price points of buy action in the gold market, rather than basing your buying and selling on analysis. There are much bigger landmines than Lehman that could implode, and you can’t predict these implosions in advance.

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