Friday, June 18, 2010

Playing The Mania?

It's up to you to decide whether this report is exciting or scary, but Bengt Saelensminde is openly recommending playing the gold market on the assumption that the third and final stage of the gold bull market is upon us. He says that the final stage is where gold will go nearly vertical, pushed by a ramp-up in investment demand as the general public flocks into gold. He calls that final stage a "trader's paradise." Yep, Saelensminde smells bubble - and he's ready to play it.

In a nutshell, his strategy is to buy a little gold at a round number (like, say, $1,250) and buy more when the metal advances another $100/oz. In essence, he advocates pyramiding. In order to bail out of the collapse, he also recommends a trailing stop loss at 15% below the then-current price.

Needless to say, this is both cynical and risky. Pyramiding always is: there's no guarantee that a stop-loss order will be filled at the stop price. Stop orders become market orders after the stop threshold is crossed; they do not guarantee that the live market order will be filled at the stop-limit price. In a severe crash, the order would be activated at a much lower price. Saelensminde also recommends playing the metal through a "financial spread bet." Believe it or not, the firms who offer those bets are exactly like the bucket shops that young Jesse Livermore cut his teeth in.

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