This Summer of 2007

Today, I am writing in the train, going back to Paris, and I take the time to reflect on this summer.

At the beginning of July I expected and also hoped for a kind of crisis.
In a way, I was afraid that nothing would happen.
Well, I can say that I was not disappointed by the extent of the financial crisis that happened this summer, but the consequences for the Gold price have been disappointing so far.

In truth, I am not surprised anymore, by this kind of counter-intuitive moves, especially since May 2006 when I exited the stock market at the best moment, but reinvested everything in a Gold stock and erased more than half of my substantial gains of the first 4 months of 2006.
I exited this stock and avoided the worst,but subsequently, I erased all my gains by trying to exploit the sell off, and misinterpreting and failing to take advantage of the volatility of that Spring-Summer 2006.

This is when I started to read everything about Gold and got really interested.
Actually I had started to get interested in late 2005, early 2006, but was not so much comitted. I guess the lesson is still the same : read everything BEFORE investing.

Anyhow, I decided to invest again in this gold stock in september when I observed that it had found some support and might be recovering.
Two or three months later, it went up spectacularly, and I was vindicated.
I had recovered a big part of my maximum gains for 2006.
But I wanted more after everything that I had suffered, and the time I had spent on this case (another common mistake). So I did not materialize these gains and later the stock started to fall.

But I still believe in this stock and especially since its value depends on the Gold price.
My guts told me that all this suffering would pay in the end. And in the mean time, I could learn a lot about finance, history, politics and market psychology.
It is very similar to what I experienced with a Silicon wafer manufacturer whose stock I bought in April-May 2002. (this particular timing was because I thought that the worst of the dot com bubble popping was over). When the stock started to fall, I did not want to sell, and I started to read everything about the technology and its market. Two years and 8 months later it finally paid, but I did not really took advantage of the whole increase. In truth, I could have made a lot more money if I had stuck to this stock longer.
This is probably why I decided to stay longer with this gold stock this time, in spite of the risks.

Sometimes, I have doubts about this strategy because it is incredibly risky to invest so much of your own money in only one small company.
But now I know its business pretty well and I also know how it moves compared to the gold price. And I also have studied the evolution of the Gold price as well.

To summarize my analysis, I am quite confident in the potential of Gold in the long term, for several reasons that I will expose later, but I am even more confident that at some time in the medium term (say, less than six months) it is going to spike higher and I will use this opportunity to cash substantial gains. At least I will start selling and reducing my “Value at risk”, and start breathing more normally.
It might not make an enormous annual return (if I count 2 years of activity since the beginning of 2006) but it will be positive.

The worst is never certain

On Tuesday 26th June, the price of gold has plunged once again, to 642$/once, and the price of silver even more at 12,25$/ounce.
It could even make one doubt about the case for precious metals.
A few days before my favourite Gold Stock had plunged even more, threatening to break its oldest support levels.

But the weakness of Gold is paradoxically reassuring me on my investment in this gold stock. It means that there is nothing specifically wrong in this company. The context is just temporarily bad.

And I have no doubts that the price of gold is going to rebound because the US Dollar is getting weaker and weaker against more and more currencies, especially the Euro and the Pound Sterling.
The Swiss Dollar could follow and maybe even the Japanese Yen (from its current lowest level).

I think a perfect storm is building on the currencies front.
Ultimately, the weakness of the dollar is going to transform itself in a new rebound for Gold.

I think currencies are the precursor of gold moves, because they their transaction volumes are huge and undisputable.
Also the price of the crude could play a role in these new movements, and the medium term trend is up.

For all these reasons, I believe the recent weakness in Gold is probably a Bear Trap.

I wouldn't wait for the end of the summer to be positioned in precious metals.

If only because a geopolitical crisis could develop at any moment, and it could be the worst one in a very long time.

Of course the worst is never certain.
But we should prepare for the eventuality of something big, in matters of investment.