Instead of Gold, I Should Have Bought Amazon

by JDH on October 28, 2017

So Jeff Bezos, the Amazon guy, is now the richest dude in the world, after Amazon had blow out good earnings and blasted through $1,000, and then $1,100, on Friday.  Gold bounced back on Friday, but after a dismal few weeks, Amazon was the correct play, not gold.

As I reported last week, gold is up on the year, increasing from around $1,150 to around $1,270, so that’s a gain of over 10%, which is nothing to sneeze at.

Of course if you play gold by buying  NUGT – Direxion Daily Gold Miners Bull 3x Shares NYSE + BATS, the picture is not so pretty.

NUGT started the year at $31, and is now in the $29.50 range, so even an up year for gold has resulted in a down year for NUGT.

That’s not surprising.  NUGT is not actual gold; it’s not even actual gold shares.  It’s a leveraged play on gold mining shares, and it aims to give 3 times leverage on a daily basis, and they do it with options.  Options lose value over time, so NUGT is not a long term hold.  If you expect gold to rise next week, you buy NUGT.  Then, next week, you sell it.

If you hold it long term, the time value of the underlying options erode, and you lose money.  That’s why a 10% rise in gold this year has translated into a loss in NUGT.

My timing was bad over the last few weeks.  I had a small profit in NUGT, but instead of cashing in, I got greedy, and now I’m in a slight loss position.

So, this week, I averaged down, by buying more.  (I also bought and sold some JDST this week, which is a short play on gold, and I made money on that).

Here’s the key: you should never be fully invested in NUGT, or any other triple-leveraged EFT.  If I have $10,000 to play with, I’ll buy $2,000 worth of NUGT, and if it goes down, I buy $2,000 more to average down.  I can average down four times before I’ve used up all of my capital.  Hopefully the trade moves in my favor, and I can start selling.

That’s the plan.  No luck so far on this round, but hopefully it turns around next week.  We shall see.

Final point: the market is looking toppy, so my plan is to gradually increase my cash position, because this exuberance can’t continue forever.

Thanks for reading; more next week.