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Benefits for Traders and Speculators

Traders and speculators want a market that makes profits easier to achieve. The current and pending precious metals market offers an environment for just that. In the next sections, I want you to consider supply and demand as the ulti- mate factors in your wealth-building pursuits. Supply and demand As a trader or a speculator, what do you think of when you hear the phrase “supply and demand”? Say what? Do you think of Mrs. Krapalbee in your col- lege econ course on the first day of the semester? Let me change that dynamic. Think “profits.” When you understand this simple, age-old, founda- tional economic idea and apply its eternal wisdom to today’s fast-moving, modern markets, you can make a profit easier. This idea sits at the heart of your trading/speculating success. The natural resource (or commodities) sector is wonderfully positioned for gains in the coming years. Breaking it down a step further, natural resources can be neatly separated into two segments: finite natural resources and renewable natural resources. Renewable natural resourcesinclude things such as corn, sugar, coffee, and so on. Now don’t get me wrong — I like these areas and they have been profitable markets since natural resources have been in a multiyear bull market and it will continue for years to come. But you know what happens with renewable resources. The news reports “the coffee crop in Brazil will be down this season” and the price of coffee goes up on the news and you say “time to percolate some profits!” and you buy coffee futures. Then . . . as you smell the aroma of fresh-brewed money . . . wham! The next report says “Chile expects record coffee harvest” and your coffee futures nose-dive as you say “I knew I shoulda done cocoa instead!” Well, I know that over-simplifies it and maybe I’m a little biased. These are great markets with great opportunities but I prefer to speculate with finite natural resources. Yes . . . by a country mile. Why? Finite natural resourcesrefer to resources that are not readily renewable or replaceable. Good examples are oil, natural gas, base metals, uranium, and precious metals. In other words, whatever we find that is above and below ground . . . that’s it! No more. Our society ultimately finds substitutes, but only if it really, really, really has to. That’s humanity. We go through a painful transition as we move from one resource to the next but we hang on to the original resource until a suitable substitute comes along. A good example is oil. Modern societies use oil and will keep using it until it’s gone, but progress has been too slow into cleaner substitutes such as solar and wind energy. In the meanwhile, think about the following dynamic: The world population keeps growing. The nations of the world keep expanding their money supplies. Finite natural resources are slowly being used up.

Huge gains potential I have one client who opened a commodities brokerage account in late 2003 with $40,000. Options on silver futures were purchased. After a roller-coaster ride complete with bone-jarring corrections, the account was worth over $300,000 by May 2006. A 650% return in about two and a half years. Nice! That doesn’t include the fact that the original $40,000 was taken out of the account and sent back to her. Nicer! This was of course speculation but it was done with only 10 percent of her money. Silver in that time frame went from under $5 in 2003 to over $14 in May 2006. What would happen to an account like that if silver was to go to its old high of $50? Of course, $50 was its old high in 1980. Adjusted for inflation it would be in three figures. That’s the type of potential that makes speculators salivate.

Trading versus speculating I know an associate who likes to speculate and he hates trading. Trading is too much work and it requires a lot of time, attention, and timing. Plus you add in the transactions costs. After you factor it all in, you may make a profit of . . . say a few hundred bucks. Now there are traders out there who make some great profits and even a good living at it. Trading with options and/or futures has a lot of advantages. As for me . . . I’m not a trader. I’m a speculator. Being in a full-time business and helping to raise my two young boys means that trading is not right for me. Successful trading takes a lot if you are going to make it work. I prefer speculating because I can do all of my homework and make a few transactions such as buying that small stock with great potential or getting a long-dated option on, say, a silver futures contract and then wait for the fireworks. This has worked better for me.

The benefits of speculating As I have mentioned before, speculating is akin to financial gambling, but if you do your homework, you can greatly increase the odds in your favor. It is possible to take a small amount of risk capital and parlay it into a much larger sum. Here are some benefits of speculating: With knowledge, research and discipline it is possible to make great money.During 2004–2006 virtually everyone of my long-term clients either made good money or great money. I know real-life examples of clients who turned $5,000 into $20,000 or more in a few months. You can do it with little money.I know several clients and students who started with as little as $1,000 in futures options and some who started with as little as $500 in stock speculating and all have made great profits. You can minimize your risk.Many think that to turn a small sum into a great sum that you need more leverage. Not really; you can utilize vehi- cles that have leverage with the risk of leverage (such as options). Futures is a great area for speculating and I certainly cover futures (in Chapter 14), but my favorite for speculating is options. Whether it’s options on stocks or on futures, my belief and experience tell me that it is a great way to profit without incurring undue risk. The phrase “undue risk” sounds loaded, but it will make sense. Futures carry risk beyond your purchase price. You could get into futures with, say, $5,000 and within days lose the entire sum plus still owe thousands. Yikes . . . who needs that? This is why it is important that besides knowing the benefits of speculating you should understand the risks before you begin transacting.