Saturday, February 11, 2006

Stay the course

February has not been a kind month to the actively managed part of my portfolio which has given back about half of the gains make in January. This is post is not about licking my wounds, however, instead after re-examining my premises, I have decided to "stay the course", regardless of whatever negative connotations that phrase may now bring.

Let’s review my trading activities in the PM sector so far this year. I have stated unambiguously my belief that we are currently in the second phase (wave III in Elliott wave parlance) of gold’s decade long advancement. The first up leg of this phase will probably end with the HUI (Amex gold bugs index) in the range 350-390, as mentioned in this earlier post. I also indicated my desire to engage in some intermediate term trading where I’ll lighten my gold holdings by 1/3-2/3 during this up leg and load up again after a pull back.

As indicated in the chart above, I have lightened about 1/3 of my position: approximately 1/6 on 1/31, the same day the near term top occurred; and another 1/6 on 2/7, upon a break in the short term up trend. The mutual funds which are not ideal trading vehicles were sold first. I still believe the gold bull has some distance to run, and as such have labeled the current decline wave (4) of 1 of III (note the labeling has changed from this post).

One reason to believe this up leg will continue is provided by the HUI/gold ratio chart below. After factoring out the rise in the spot price of gold, the up leg so far is not nearly as powerful as the previous ones. Therefore, the rally should continue as dictated by the self-similarity of the waves, in which case this sell-off would be the last chance for traders to establish their positions. Before the close on Friday, I bought 5 March 20 calls for GG at $4.70, paying $20 per call for the privilege of limited down side. I know I’m indulging myself a bit here, but felt the need to put money where my mouth is. I’m willing to give it a week to work out.

What if I’m wrong? Quite a few gold gurus have called a top this weekend. Ironically, the sell orders I have entered so far would then be objectively considered perfectly timed. I would hold the rest of my PM equities and may even add to them in 7-9 months when another up leg resumes. I’m steadfastly long-term bullish on the PM sector. This was the reason I choose to trade them in the first place: I don’t mind holding them if I don’t time my exits perfectly.

The energy sector is inflicting as much pain to my portfolio as the PMs. I take an even longer term perspective there. With some fresh powder in my account, I’ll likely be looking for good entry points in some uranium and coal stocks.