JLN Metals Editor Chris McMahon recently spoke with Noble DraKoln, founder of the Speculator Academy and author of both “Wining the Trading Game” and “Trade Like a Pro.” DraKoln, a 17-year veteran of the gold trade, also recently published a white paper that compares the pros and cons of trading gold futures vs. gold exchange traded funds. The following is the second of two parts (read part 1 here).
“There are pros and cons to any kind of trading, but futures are the best place to get a competitive edge,” says Noble Drakoln.
McMahon: You’ve been a trader for a while, how long have you been trading and how did you start?
DraKoln: “I became an assistant broker at 17 and got my license at 19, so I have been watching the gold continuously. That’s all we traded for 18 years. I’ve invested in it, I’ve bought it and sold it. And the biggest thing that I would tell anybody is: don’t look to gold as a panacea for all your financial ailments. The reality is that there are a lot of moving pieces right now. This is the first time we have had a real, global economy; where a sneeze in Indonesia has a big affect on the price of Canadian Maple syrup. These things are so interrelated now. Individual investors have to look towards their individual investment in gold much differently than those who made gold rally in the ‘80s. They should look at as part of their portfolio and they should be as close to the commodity as possible and be able to get out of it as quickly as possible when it changes. There is no guarantee that this will be the best trade. We could see countries all of a sudden decide to stop using gold as their back up at any given time because we are running a gold shortage. People are still not talking about that, but it’s a big factor. You just have to look at it and take advantage of it for as long as possible.
That’s interesting and very true. A lot of people seem to be very emotionally attached to gold. There are a lot of preconceptions and world views…
“My point is that if you want to get involved, get as close to the commodity as possible. If you can’t afford to buy $100,000 worth of gold, look to trading the futures because they get you as close to the commodity and the commodity’s reaction as possible.”
I talked with a trader this morning who told me that for a long time, they thought that Greece was going to be fine because so much of their currency reserves were in gold, and it didn’t make a wit of difference.
“No, it didn’t. I have heard this before and the problem is that, just because you have reserves doesn’t change your fiscal policy or how you operate, and Greece was pretty spendthrift. And maybe they were spendthrift because of the gold. Not just people, but countries can decide that there’s no place for gold to go but up and they make they make the assumption that for every one they have, there’s the potential to turn it into two just because they are holding onto their gold reserves and so they start spending ahead of the money. A lot of people are predicting that, based on predicted inflation rates, gold is heading towards $2,400 per ounce from the last big rally that occurred rather than focusing on the current rally and understanding it for what it is. So, who knows? Maybe that’s what drove the spending. I spend a lot of time in Eastern Europe: Romania, Bulgaria and Hungary and the Czeks. A lot of these countries wanted to be part of the EU, but the reality is that they were not fiscally or financially ready to do it. I remember I used to have partners in Portugal and Spain that did import and export trade back in the ‘90s, these countries are part of the EU, but the strength of the EU is being diluted. It’s 70% weighted on German Deutsche marks, it’s the only stable country there. And so when it came up that Greece was having problems and was looking to Germany to bail them out of these problems, I wasn’t really surprised. They are the only country that should be allowed in the EU, so it’s funny how it all comes full circle. These countries that are buying these reserves hold precious metals and other non-liquid assets. You really just can’t dump a hundred tonnes of gold; and now they are all being affected by this fiscal irresponsibility that they EU was fighting against in the first place. So it’s a really odd scenario and I think we are going to see more problems, not less.”
So, what about the IMF and the false rumor that China was going to buy the IMF gold. Could they sell it without making an announcement as to who bought it?
“I don’t know. Realistically, they could say that they have a set number of tranches that they distribute annually and the countries bid on it accordingly. And it’s usually 300 [tonnes] to 400 tonnes that’s available. So if they are back door selling to China, who knows, but I know they are only supposed to sell set amounts every year. Side door trading takes place all the time, but as a trader I can’t really focus on that. I have to watch the screen, look for trends and see what’s going to happen. We don’t really know what is going on in the European Union, there is a culture there that keeps problems suppressed for as long as possible, but it’s always going to show up on the screen eventually.
There’s another story out there that gold coin sales have fallen through the floor in Europe, which I thought was really interesting, you’d think that people who are much closer to the pending disaster would be acquiring gold as a hedge against their currency being devalued; or has it already crested a point of diminishing returns. Are gold prices so high that they just can’t get in?
“That’s what I was just talking about. Originally, [the euro] was set as a currency that was considered as strong as the dollar or the British pound. Now we have a four legged race: we have the U.S. dollar, the British pound, the euro and we have gold. Well, it used to be that any of these smaller European countries could have either the dollar or gold. If you had Italian lira, you could buy the U.S. dollar when the dollar was strong. If the dollar was weak, you would buy gold as your hedge to back up your local currency. Now the European currency has effectively become pegged to the gold market. I don’t know how it happened specifically, but now we see the U.S. dollar and the euro are down and there is no benefit to all of a sudden buy gold because it’s moving at the same pace downward as their local currency. So I wouldn’t be surprised to see a resurgence in a lot of people buying dollars to cap off some of the deflationary pressure that is happening in the euro currency and to catch up with the dollar. It’s become more difficult to do it, so I’m not surprised.”
Thank you joining us, we appreciate your time and insights.