Philip Gotthelf


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Philip Gotthelf publishes the Commodex System and Commodity Futures Forecast Service. His writing has appeared in Futures magazine, Investing, Stocks and Commodities , Top Farmer , Barron's , Forbes , The Wall Street Journal and Fortune , among others. He is a regular guest on CNBC, MS-NBC, and CNN.

Precious metals trading

  1. Precious metals are not 'investments' in the traditional sense.

    Since they have no intrinsic yield like stock dividends or bond interest, any profit must result from an accurate price forecast. Therefore, precious metals should be considered 'trading vehicles' similar to other commodities and international currencies. When trading metals, the objective is to determine the trend and its associated time frame. A trend is defined as a consistent and observable price direction over a reasonable time. Metals generally exhibit long term or secular trends over several months. These price patterns can usually be accurately identified using moving averages between 20-days and 60-days.

  2. Precious metals fall into two categories: monetary and industrial.

    Gold essentially stands alone as a monetary precious metal. Silver, platinum , and palladium are industrial precious metals. The category for any precious metal is determined by the amount of metal consumed for industrial purposes, i.e. industrial demand.

    Palladium represents the most industrial precious metal with virtually none used for 'investment' or jewelry. Most palladium is used for catalytic processes. Platinum rates second as an industrial precious metal with most demand coming from catalysts, too. However, there is a modest amount of platinum purchased for hoarding (bullion) and more, still, for jewelry . Silver is hoarded as bullion, coins , and medallions. However, its number one use is for film and photographic processes. Although gold has many industrial applications in electronics, chemistry , and processes, its primary application is as a store as value. It is mostly a 'monetary' metal. Always view a precious metal objectively within its respective category.

  3. Precious metals maintain parity with currencies.

    Precious metals reflect the value of currency as parity or the ratio of currency to metal defined as price. Metals maintain easily identifiable parity that allows cross currency trading against a precious metals standard. If a currency is 'pegged' to metal (i.e. gold), its gold parity becomes constant. When trading metals, always be aware of cross parity relationships between popular currencies like the U.S. Dollar, European Currency Unit, and Japanese Yen. A dramatic change in cross parity represents an element of risk and exposure.

  4. If metals are currency, they cannot be traded for profit.

    Although unlikely , there is always the possibility of a return to a metals currency standard (i.e. Gold Standard). If currency value is fixed to metal, the metal cannot appreciate or depreciate against the currency and it loses all speculative potential. Be careful what you wish for if it is a return to a metals standard. It forecloses opportunity.

  5. Metals can fall below production costs.

    In particular, precious metals that are byproducts of base metals production are highly sensitive to base metal values. If copper soars, silver can suffer because silver is a byproduct of copper . Never trade the long side based upon a presumption the price is close or below production costs.

  6. Precious metals do not always track inflation.

    Precious metals have lost ground to derivative vehicles as a hedge against inflation or changing interest rates. The old rule that gold and silver react to inflation is, itself, inflated since inflation can be hedged using currency futures, related options, forwards, and interest rate futures strategies. Never assume inflation automatically boosts precious metals.

  7. Metals are subject to structural change.

    Few trading vehicles have undergone as much 'structural change' as precious metals. In reality, these commodities have very limited price histories since they have been linked to currency parity over the past several hundred years . Structural change is defined as a change that completely alters a commodity's fundamentals. For example, the demise of a gold or silver standard was a structural change allowing values to float. The development of digital imaging that does not consume silver is a structural change for silver demand. The commercial development of platinum-based fuel cells is a potential structural change for this metal. Gold divestiture by central banks is a structural change in gold hoarding. Always look for structural change and never trade against it over any prolonged period.

  8. Never seek a predetermined top or bottom.

    Always attempt to follow a trend rather than pick a top or bottom based upon price levels alone. History proves silver can fall well below $5 that was previously viewed as a 'floor'. Palladium can soar beyond $1,000 per ounce seen in 2001 . . . virtually unthinkable before it happened . There are no tops and almost no bottoms.

  9. Precious metals do not always move in tandem.

    In the past, precious metals tended to trend in similar directions under similar fundamental assumptions. In the new precious metals market, each dances to a different drummer . Silver fundamentals are not the same as gold and these can move inversely. Platinum and palladium can be diametrically opposite based upon substitutability. Always analyze each metal on its own merits.

  10. Metals are good business.

    Falling metals prices do not automatically translate into weak corporate performances . Gold stocks can remain strong in a weaker gold market. Always look at the whole picture. Few companies produce a product that has intrinsic value like gold and other precious metals. Thus, gold mining stocks can offer double security in crisis times because of the underlying presumption of value. Gold companies are increasing efficiencies (dropping production costs) in pace with gold price trends. It is wise to have some of the precious metals sector represented in any diversified investment portfolio.

  11. Wonders never cease .

    In 1989, Professors Pons and Fleischmann announced Cold Fusion using palladium. Prices soared. Cold fusion was debunked. Prices crashed. Never rule out wonderous processes that incorporate precious metals. The platinum fuel cell could become the 'engine of the future'. Palladium could prove Cold Fusion a reality. We may perfect extracting gold from sea water. Always be prepared to accept and react. There's a reason humankind gravitates toward precious metals like gold, silver, and the platinum group . We simply don't know why . . . yet.

www.commodex.com

'If you want to be entertained, take up sky diving. There is an inverse correlation between an investment's entertainment value and its expected return.'

”William Bernstein



Global-Investor Book of Investing Rules(c) Invaluable Advice from 150 Master Investors
The Global-Investor Book of Investing Rules: Invaluable Advice from 150 Master Investors
ISBN: 0130094013
EAN: 2147483647
Year: 2005
Pages: 164

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