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Random Thoughts: Full Circle on the Silver Trade


The toughest fades are the best trades.


It's a beautiful morning in Gotham as we chew our way through Turnaround Tuesday. My weekly ritual remained in play this morning -- 6AM boxing, followed by a visit to the baby doc -- and I edged into the 'Ville with an anticipatory excitement that's difficult to describe.

My first order of business when I swallowed the last mouthful of coffee? My short-side silver ride, which has been a hairy and scary trade.

Yesterday, with silver down more than 10% on the day, I pared my short exposure to two-thirds of the original position, as shared in real-time on our Buzz & Banter. This morning, with silver futures down an additional 6%, I've peeled off another third, leaving me with a third of my original risk.

I'm notoriously early on my entry into positions and equally guilty of premature evacuation, but I trade the hand I'm dealt rather than the one I wish for. While I don't typically talk about positions while they're open, I'll share that the saving grace of this position -- entered into around current levels -- was that it was properly sized. That latitude -- those loose grips on the handlebars -- allowed me to "average up" into full positions at the $50 level not once, but twice, and peel off that overage on the subsequent trips back down.

I'm content to slap a trailing stop on my remaining risk and "go home" (flatten the position) by the end of today. All in all, it's been a decent (not great) trade but much better than it was or could have been if I was stopped out above $50. In that regard, while I may be bowing out just as this trade gets interesting, I'll have no regrets. If my forward cost is that of opportunity, so be it.

Here's the twist, and it's one I'm compelled to share. I'm expecting a pretty stringent counter-trend rally in the dollar and if/when that happens, commodities should feel the brunt of that equilibrium shift. We've talked about these crossroads in Defining a Path to Economic Recovery, Our Wishbone World, and Pick a Side: Hyperinflation or Deflation and despite the 'do no wrong' sentiment or the perceived outbreak of world peace, those dynamics very much remain in play.

I can't help but think of my infamous "Oil of Oy Vey" trade in May 2008, when I started shorting crude around $132 and got squeezed for a month or so and 10% before Texas Tea reversed sharply and began its disastrous decline down a slippery slope that sliced 80% off the value of a barrel of crude in the following six months.

I'm not saying that silver trades back to $8 by the fall, mind you, but as Mark Twain famously said, "History doesn't always repeat, but it sometimes rhymes."

Some Random Thoughts

  • The financials are again testing the right shoulder of the bearish head & shoulders pattern. BKX 52 is the level to watch, while JP Morgan (JPM), Goldman (GS), Bank America (BAC), Wells Fargo (WFC), and Deutsche Bank (DB) -- which has negative news today -- are individual tells for the sector.

  • How do we reconcile sovereign spreads (that suggest trouble ahead) and the global price action (which assumes we'll invent a solution, much as we did during earlier iterations of the crisis)?

  • Can we agree that 5-10% daily swings demonstrate extreme volatility?

  • And those spates typically occur around important cusps in the market?

  • And commodity volatility typically precedes equity movement?

  • Imagine how it would have felt if I actually went to LA yesterday to speak at the Milken Conference, as initially planned? I am entirely confident that I made the right decision.

  • Wasn't it Martin Luther King Jr. who said, "Let no man pull you low enough to hate him?"


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Position in silver.
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