In The Trenches And Getting Shelled

Nothing focuses the mind like danger, says George Soros.

I sold gold short at $500, in a size that was big enough to hurt me, stop me from sleeping, and make me look at Kitco.com for the spot price every few minutes - even in late night Japanese trading.

“Here at DailyWealth,” I wrote just a couple days before the trade, “we wouldn’t touch a trade like this.”

Short gold! What was I thinking!

I had been long. I had believed in a bull market. But I'm a contrarian. I couldn't think of a single fundamental reason for gold to go down. “Everyone thinks gold is going to $1,000”, I told myself. It's all over the headlines and it's overbought.

So I sold it short when it hit $500 the other day, with a $15 stop-loss, equivalent to 3%.

Since then, gold has gone up in a straight line. I kept expecting a correction... a chance to get out of the trade cheaper, but nothing came. Up. Up. Up. I've never seen anything like this in the five years I've been investing in gold's bull market.

I kept trying to convince myself that a 3% stop-loss is too tight, and I should let my losses run a little. Or that the best trade is the hard trade, so I should double up. Isn't that what the fearless trader would do?

Above all, I was gripped by the fear that, if I closed out the trade, gold would start tanking immediately.

I think these strong emotions were a result of more than just heavy losses. They were the result of shorting a bull market in which you believe. Not only was I losing money, but I should have been making money at the rate I was actually losing it.

Dennis Gartman says never short a bull market. You can be long or neutral, but never short. I broke that rule.

Steve says wait for the uptrend (or downtrend in this case) to begin before making the trade. I broke that rule too.

And my old friend George Soros, whose books I often turn to in times of need, says:

"Being so critical, I am often considered a contrarian. But I am very cautious about going against the herd; I am liable to be trampled on... Most of the time I am a trend follower, but all the time I am aware that I am a member of a herd and I am on the lookout for inflection points."

Soros assumes that the markets are always wrong. But that doesn't mean he goes against the prevailing trend. On the contrary, he rides the trend while looking for a flaw in the investment thesis. Even when he finds the flaw, he doesn't discard the thesis, he just rides it with greater confidence because he knows what's wrong when the market does not. He is ahead of the curve.

"Most of the time we are punished if we go against the trend."

So I broke Soros's rules too.

And I also broke the sleep rule (although I don't know who coined that one).

Wow. I deserved my thrashing.

So just now, with gold at $522, up $5 in New York trading, and another $3 in Asian trading, just like every day this week, I closed out my position. Not only did I close it out, I went long gold.

And now I fear gold is about to suffer a steep drop. And I'm going to be taken to the cleaners again. But I like fear.

It’s the hard trade... The scary trade... The right trade.

Good night. Sleep well.

Tom Dyson