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Gold Prices May Be Falling but Not Forever


NEW YORK (TheStreet) -- Professional commodity traders know when a solid trend is in place; the biggest move is usually the last. It's during this last move, also known as capitulation, is when the largest gains are made. Understanding why will help you profit while the mob panics.

In 2001, I started procuring Eagles, Maple Leaf and Krugerrand gold coins on EBay (EBAY). My goal was to buy one per month when I could win an auction or "buy it now" for under $300 each, including shipping. Eagles and Maple Leafs were hard to get as they trade for a premium over Krugerrands, but over time I managed to buy a few. I also started buying American Eagle silver coins.

I wasn't as much bullish on gold as I was non-bearish. After experiencing the gold bubble and subsequent pop in 1980, I was well aware of the potential but I thought they would make a suitable investment for my sons.

I had no idea, at the time, that World Gold Trust Services were creating a new financial ETF product called SPDR Gold Shares (GLD) that could create never-before seen gold demand. Following SPDR Gold Shares' success, the silver iShares Silver Trust (SLV) began trading. In hindsight, it's obvious that as soon as a catalyst lit the fuse, the gold and silver ETFs would help propel the metals to levels never seen before. The ETFs made it easy for anyone with an equity account to gain exposure in commodities. Since most retail investors are long only, it leaves only one direction: up (once the launch sequence is initiated).

Therein lies the problem, most retail traders limit their thinking to long only. Even with reverse/short "bear" products available including the Power Shares DB Gold Short ETN (DGZ), that eliminates "supposedly unlimited risk"* of shorting, the average investor condemns their portfolio to considering only half the strategies available.

Unless you believe that gold (or any other security) will only appreciate higher and never fall in price, that's a concession of self-limiting your profit potential. Failing to consider the bear thesis, by definition, also means you're not fully examining why, or what your counter-party is convinced of. Never forget that when you buy a dip, there is always someone on the other side selling with the same level of conviction that selling is the correct decision.

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