Investing in Gold: A Poker Player’s Perspective
Poker is a beautiful yet brutal game. (I speak here of No Limit Texas Hold ‘Em, widely known as “the Cadillac of Poker.”)
In some ways, poker can be even more brutal than traditional contact sports like football, rugby or lacrosse. There are no physical confrontations in the card room, of course (assuming you play in a reputable joint). But the routine collisions of money, emotion and ego can hit like a 300-pound linebacker.
What’s more, skilled poker players know that much of their profit comes from exploiting other players’ mistakes. It sounds cynical, but the statement is very true.
T.J. Cloutier, one of the all-time poker greats, has said that winning a tournament comes down to minimizing your total number of mistakes. If you take the full sum of your mistakes and weigh it against the sum of your opponents’ mistakes, the player with the smaller tally comes out on top.
Poker champ Chris “Jesus” Ferguson takes the idea even further. Ferguson highlights the importance of forcing other players to make hard decisions. The tougher the decision, Ferguson says, the greater the odds your opponent will make a mistake… which you then have a chance to profit from.
Opportunity in Adversity
Turning to markets, these concepts explain why there is opportunity in adversity. When markets are following the generally accepted script, the odds of the crowd making a mistake are lower. Smooth trends leave few tough decisions to be made.
But when something volatile or unexpected happens, causing reason to doubt, the tough decisions are suddenly front and center. This is when the crowd is most likely to make a mistake, creating an opportunity to be exploited.
Introducing... The World's Most Dangerous Man
In less than a decade his empire has placed the world's economy in a stranglehold, and now he's gunning directly for the United States. Who is he? What is he doing? How can you protect yourself from his dangerous game? Learn all you need to know in my exclusive on-location report, including how you can pull in a potential 493% once the dust settles. This may be the most important letter you read all year...
As a long-time Nevadan with poker in my blood, I have to admit… I like it when the market puts a tough decision out there. I smile a little when the script goes off-kilter and the crowd’s faith is shaken.
This isn’t because I’m ornery by nature. It’s because I understand, after hundreds of hours in the card room, that this is where opportunity comes from.
Taking a Hard Look at Gold
So let’s take a look at gold in this context…
Precious metals are in the dog house right now. The depth and swiftness of the correction has caught many by surprise. But what does this mean?
As with poker, no market movement should be analyzed in pure isolation. The surrounding details are always an important factor. So let’s lay out a few key points.
Gold’s initial doubling in price, from $300 in 2002 to $600 in early 2007, came before the subprime crisis hit the scene.
The major factors propelling gold higher were in place long before the “credit crunch” was even a blip on the radar screen.
As the magnitude of the subprime crisis became apparent, gold’s acceleration kicked into high gear.
Investors panicked into hard assets for the first quarter of 2008, as the Fed slashed rates with abandon to stave off the credit crunch.
After first touching $600 an ounce in early 2006, gold’s trek from $600 to $800 took more than 18 months. The following sprint from $800 to $1,000 was measured in weeks.
That’s the backdrop to gold’s breathtaking run-up and sharp correction. Gold had been trending higher for years, well before “subprime” became a dirty word. The move from $600 to $800 an ounce took well over a year and a half. That seemed quick but, as it turns out, was actually slow in comparison to what came next. Gold’s final $200 sprint was measured in weeks as Wall Street imploded.
So where does that leave us, now that gold has come off sharply and dramatically from its historic $1,000-plus highs? Here are a few more factors to consider.
Hedge funds have been struggling mightily in 2008, as jittery investors pull their funds, leveraged positions are wound down, and battered brokerage houses cut off lines of credit.
Funds with highly profitable positions in commodities and precious metals have been forced to cut back or even abandon those positions -- not because they became unprofitable, but in order to reduce risk, meet investor redemptions, and otherwise “stop the bleeding” in other parts of the portfolio.
A flood of hot money played a role in rocketing gold higher on the last leg of the run. This hot money has an LIFO mentality -- “last in, first out.” When momentum starts to dominate, this type of pile-in happens at the extremes.
Last, but certainly not least, the big-picture reasons for being bullish on gold -- the reasons that were powerful before the subprime crisis ever unfolded -- are still wholly intact. If anything, these reasons are stronger than ever.
Celebrate the Battle, but Don’t Forget the War
Right now, in my view, investors are cheering because it looks like the relentless march of big bank write-downs is finally nearing its end. Wall Street sees light at the end of the subprime tunnel. As a result, traders have been covering their shorts and bidding up financial assets with gusto. The big crisis could be averted.
This short-term optimism is powerful enough to sustain a rally that could last for weeks, or even months. What seems clear, though, is that this newfound optimism isn’t grounded in the longer-term picture. It’s a “relief rally” in the most emotional sense of the phrase. Even if the brokers and the banks have disgorged all their bad news -- gotten it out of their system, like a nasty stomach flu -- the reality of larger problems still looms.
I’m particularly thinking of consumers here, and the massive overhang of debt that still threatens to bury any hope of quick recovery. Remember that consumer spending accounts for two-thirds or so of the U.S. economy, and the reality of consumer pain is just now beginning to hit home.
In other words, Wall Street balance sheets may have seen their worst, but troubles on Main Street are still building momentum. News on the consumer side -- tightening credit, rising food and gas prices, delinquent bill payments, delayed retirements, trashed homes -- continues to be of great concern.
Worse still, the Fed has already used up most of its bullets. Ben “helicopter” Bernanke has gamely slashed interest rates again and again in a heroic effort to save Wall Street from itself.
But what happens when debt-laden consumers cry out to be saved, too, and there are no more basis points left to cut? It’s one thing to funnel hundreds of billions in emergency loans to the likes of JP Morgan and Goldman Sachs; but how will that trick be repeated for tens of millions of Americans?
We may soon discover that, in sparing no effort to win a battle, the Fed has greatly increased the likelihood of losing the war. The long-run implications of the Austrian endgame have changed not a whit. Von Mises’ prediction -- that the government-led cycle of boom and bust inevitably results in destruction of the economy or destruction of the currency -- looks as smart as ever.
That is why I remain bullish on gold. The run-up in the midst of the subprime crisis was practically gravy. For all the horror of imploding investment banks, Wall Street’s woes were something of a grand sideshow.
Little Pots, Big Pots and Monster Pots
If you’ll indulge me, here is one last poker analogy to finish up for today. In cash game poker there are three types of pots: little pots, big pots, and monster pots.
A little pot is one where there aren’t many chips in play. In my regular game, that could mean $50-$100 at stake. (Loose change for the No Limit Hold ‘Em player.) A big pot, in contrast, might run $500 or so. And the truly monster pots? They can run well into the $1,500 range and beyond.
The little pots in this quick and dirty analogy equate to trading opportunities. You don’t risk as much in little pots, and you don’t make that much either. But the virtue of little pots -- and routine trading opportunities -- is that they come along quite frequently, allowing you to make money in steady fashion, a little at a time. (My pal, Cash McDash, is an expert at this.)
Focusing on little pots can be a very profitable business. It’s the bread and butter for a lot of traders, and a lot of poker players, too. (The nickname for this style of play is smallball.)
Big pots, in contrast, are relatively less frequent. You might see a big pot once or twice in a long session. And the truly monster pots are rare sights to behold. You know you’ve hooked a monster when you look down at an open-ended straight flush draw with two cards to come, even as two of your deep-stacked opponents push all their chips in.
Neglected Gold Could Be a Monster Opportunity
Monster pots are equivalent to the truly major investment opportunities that come along very infrequently. At the poker table, you might only participate in one monster pot for every 20 or 30 hours of play. In markets, you might see a monster investing opportunity once or twice a year. (And in some years, they don’t come at all.)
If gold goes into an extended funk here, I believe it could set up a monster-pot type of opportunity for long-term investors. In other words, if the LIFO money trickles out, and the fair-weather fans all move to the sidelines as momentum dries up, a period of consolidation could provide the perfect opportunity to load up. For those with a sharp eye and a strong constitution, this correction could turn out to be a gift.
A similar opportunity existed in the big bull run of the 1970s, by the way. There was a gut-wrenching correction that made it look as if gold had given up the ghost. It turned out to be a buying opportunity of major proportions.
Hopefully, you enjoyed this brief foray into the world of poker. If so, we can revisit lessons from the card room every now and then -- and I promise not to tell you any bad beat stories.
In some ways, poker can be even more brutal than traditional contact sports like football, rugby or lacrosse. There are no physical confrontations in the card room, of course (assuming you play in a reputable joint). But the routine collisions of money, emotion and ego can hit like a 300-pound linebacker.
What’s more, skilled poker players know that much of their profit comes from exploiting other players’ mistakes. It sounds cynical, but the statement is very true.
T.J. Cloutier, one of the all-time poker greats, has said that winning a tournament comes down to minimizing your total number of mistakes. If you take the full sum of your mistakes and weigh it against the sum of your opponents’ mistakes, the player with the smaller tally comes out on top.
Poker champ Chris “Jesus” Ferguson takes the idea even further. Ferguson highlights the importance of forcing other players to make hard decisions. The tougher the decision, Ferguson says, the greater the odds your opponent will make a mistake… which you then have a chance to profit from.
Opportunity in Adversity
Turning to markets, these concepts explain why there is opportunity in adversity. When markets are following the generally accepted script, the odds of the crowd making a mistake are lower. Smooth trends leave few tough decisions to be made.
But when something volatile or unexpected happens, causing reason to doubt, the tough decisions are suddenly front and center. This is when the crowd is most likely to make a mistake, creating an opportunity to be exploited.
Introducing... The World's Most Dangerous Man
In less than a decade his empire has placed the world's economy in a stranglehold, and now he's gunning directly for the United States. Who is he? What is he doing? How can you protect yourself from his dangerous game? Learn all you need to know in my exclusive on-location report, including how you can pull in a potential 493% once the dust settles. This may be the most important letter you read all year...
As a long-time Nevadan with poker in my blood, I have to admit… I like it when the market puts a tough decision out there. I smile a little when the script goes off-kilter and the crowd’s faith is shaken.
This isn’t because I’m ornery by nature. It’s because I understand, after hundreds of hours in the card room, that this is where opportunity comes from.
Taking a Hard Look at Gold
So let’s take a look at gold in this context…
Precious metals are in the dog house right now. The depth and swiftness of the correction has caught many by surprise. But what does this mean?
As with poker, no market movement should be analyzed in pure isolation. The surrounding details are always an important factor. So let’s lay out a few key points.
Gold’s initial doubling in price, from $300 in 2002 to $600 in early 2007, came before the subprime crisis hit the scene.
The major factors propelling gold higher were in place long before the “credit crunch” was even a blip on the radar screen.
As the magnitude of the subprime crisis became apparent, gold’s acceleration kicked into high gear.
Investors panicked into hard assets for the first quarter of 2008, as the Fed slashed rates with abandon to stave off the credit crunch.
After first touching $600 an ounce in early 2006, gold’s trek from $600 to $800 took more than 18 months. The following sprint from $800 to $1,000 was measured in weeks.
That’s the backdrop to gold’s breathtaking run-up and sharp correction. Gold had been trending higher for years, well before “subprime” became a dirty word. The move from $600 to $800 an ounce took well over a year and a half. That seemed quick but, as it turns out, was actually slow in comparison to what came next. Gold’s final $200 sprint was measured in weeks as Wall Street imploded.
So where does that leave us, now that gold has come off sharply and dramatically from its historic $1,000-plus highs? Here are a few more factors to consider.
Hedge funds have been struggling mightily in 2008, as jittery investors pull their funds, leveraged positions are wound down, and battered brokerage houses cut off lines of credit.
Funds with highly profitable positions in commodities and precious metals have been forced to cut back or even abandon those positions -- not because they became unprofitable, but in order to reduce risk, meet investor redemptions, and otherwise “stop the bleeding” in other parts of the portfolio.
A flood of hot money played a role in rocketing gold higher on the last leg of the run. This hot money has an LIFO mentality -- “last in, first out.” When momentum starts to dominate, this type of pile-in happens at the extremes.
Last, but certainly not least, the big-picture reasons for being bullish on gold -- the reasons that were powerful before the subprime crisis ever unfolded -- are still wholly intact. If anything, these reasons are stronger than ever.
Celebrate the Battle, but Don’t Forget the War
Right now, in my view, investors are cheering because it looks like the relentless march of big bank write-downs is finally nearing its end. Wall Street sees light at the end of the subprime tunnel. As a result, traders have been covering their shorts and bidding up financial assets with gusto. The big crisis could be averted.
This short-term optimism is powerful enough to sustain a rally that could last for weeks, or even months. What seems clear, though, is that this newfound optimism isn’t grounded in the longer-term picture. It’s a “relief rally” in the most emotional sense of the phrase. Even if the brokers and the banks have disgorged all their bad news -- gotten it out of their system, like a nasty stomach flu -- the reality of larger problems still looms.
I’m particularly thinking of consumers here, and the massive overhang of debt that still threatens to bury any hope of quick recovery. Remember that consumer spending accounts for two-thirds or so of the U.S. economy, and the reality of consumer pain is just now beginning to hit home.
In other words, Wall Street balance sheets may have seen their worst, but troubles on Main Street are still building momentum. News on the consumer side -- tightening credit, rising food and gas prices, delinquent bill payments, delayed retirements, trashed homes -- continues to be of great concern.
Worse still, the Fed has already used up most of its bullets. Ben “helicopter” Bernanke has gamely slashed interest rates again and again in a heroic effort to save Wall Street from itself.
But what happens when debt-laden consumers cry out to be saved, too, and there are no more basis points left to cut? It’s one thing to funnel hundreds of billions in emergency loans to the likes of JP Morgan and Goldman Sachs; but how will that trick be repeated for tens of millions of Americans?
We may soon discover that, in sparing no effort to win a battle, the Fed has greatly increased the likelihood of losing the war. The long-run implications of the Austrian endgame have changed not a whit. Von Mises’ prediction -- that the government-led cycle of boom and bust inevitably results in destruction of the economy or destruction of the currency -- looks as smart as ever.
That is why I remain bullish on gold. The run-up in the midst of the subprime crisis was practically gravy. For all the horror of imploding investment banks, Wall Street’s woes were something of a grand sideshow.
Little Pots, Big Pots and Monster Pots
If you’ll indulge me, here is one last poker analogy to finish up for today. In cash game poker there are three types of pots: little pots, big pots, and monster pots.
A little pot is one where there aren’t many chips in play. In my regular game, that could mean $50-$100 at stake. (Loose change for the No Limit Hold ‘Em player.) A big pot, in contrast, might run $500 or so. And the truly monster pots? They can run well into the $1,500 range and beyond.
The little pots in this quick and dirty analogy equate to trading opportunities. You don’t risk as much in little pots, and you don’t make that much either. But the virtue of little pots -- and routine trading opportunities -- is that they come along quite frequently, allowing you to make money in steady fashion, a little at a time. (My pal, Cash McDash, is an expert at this.)
Focusing on little pots can be a very profitable business. It’s the bread and butter for a lot of traders, and a lot of poker players, too. (The nickname for this style of play is smallball.)
Big pots, in contrast, are relatively less frequent. You might see a big pot once or twice in a long session. And the truly monster pots are rare sights to behold. You know you’ve hooked a monster when you look down at an open-ended straight flush draw with two cards to come, even as two of your deep-stacked opponents push all their chips in.
Neglected Gold Could Be a Monster Opportunity
Monster pots are equivalent to the truly major investment opportunities that come along very infrequently. At the poker table, you might only participate in one monster pot for every 20 or 30 hours of play. In markets, you might see a monster investing opportunity once or twice a year. (And in some years, they don’t come at all.)
If gold goes into an extended funk here, I believe it could set up a monster-pot type of opportunity for long-term investors. In other words, if the LIFO money trickles out, and the fair-weather fans all move to the sidelines as momentum dries up, a period of consolidation could provide the perfect opportunity to load up. For those with a sharp eye and a strong constitution, this correction could turn out to be a gift.
A similar opportunity existed in the big bull run of the 1970s, by the way. There was a gut-wrenching correction that made it look as if gold had given up the ghost. It turned out to be a buying opportunity of major proportions.
Hopefully, you enjoyed this brief foray into the world of poker. If so, we can revisit lessons from the card room every now and then -- and I promise not to tell you any bad beat stories.
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