December 9, 2009

In February, 1983, I had been in the futures industry for about 2 ½ years and had been a broker handling my own accounts for about 1 ½ years…just long enough to have had a few successes and therefore lead me dangerously to the conclusion that I knew what I was doing…Gold was trading just above $500 and I was long gold futures (there were no options then) on margin with all of my accounts, with all of us convinced gold was on the verge of a “breakout” and about to surge straight towards $600 an ounce…At the same time, as I was somewhat regarded as  young “hotshot” in the Merrill Lynch Commodity office, I was selected, together with a much older broker, to go to Merrill’s New Jersey training campus for a three day seminar on Stock Index Futures which had been initiated the year before as a new futures product…All my clients about to make a hit in gold and off on a company paid trip to New England? I thought I had it made…

On the Tuesday that we left for New Jersey, gold, however,  had for some “unknown” reason closed down its $25 limit, or $2500 a contract…While I was confused by this abrupt decline, there was nothing I could do about it, and off I went to the airport just supposing this was a bit of market volatility.

On Wednesday, gold was down another $14. While this made me, to put it mildly, a little uneasy, I felt like the fact it hadn’t gone down limit again might mean the worst was over. During that day, I was pulled out of the seminar several times for phone calls from the margin clerks at Merrill’s New York headquarters wanting to know how various clients’ margin calls were going to be handled…whether money was being wired (remember, these are futures, where “you can lose more than you invest” is absolutely true) or if the clients were liquidating, or if they had  liquidated and still owed money, when would Merrill be receiving it…I made the usual “reassurances” to NY that I was in communication with my accounts and I had everything under control…Meanwhile, I also noticed that the twenty or so other brokers in attendance were periodically being called out of the seminar for phone calls, which I only several years later learned, were the result of their being in the same sinking precious metals boat I was in…

On Thursday, gold opened about $5 higher, and after a fairly slow day, closed a few dollars higher…I thought I was out of the woods, thinking maybe this “pullback” had stabilized and was now ready to turn back up.

NOT so! The next morning, Friday, gold opened down about $8, rallied about $4, then spent the rest of the day on its way to close locked limit down $25, meaning that the market had dropped almost $62 for the four day week (Monday had been closed for a holiday) or $6200 per futures contract… Limit down meant the market had declined as much as they would allow in a single day’s trading and there were therefore massive “pools” of sellers trying to get out, as there were no buyers at the limit down level, meaning none of the sellers could exit their long positions…and would most likely be there trying to do so when trading reopened Monday…Most of my clients (fortunately really just a handful of people as I was still quite the rookie) had been stopped out, having maybe lost everything they had in their accounts and then some, but I still did have a few guys who were still in, already with deficit balances (owing the house money) and telling me, “Just hold them off in New York another day. It’s gotta turn this weekend.” With one of the rules in this business being that I, the broker, am responsible for my client’s margin calls if they don’t pay, as a 32 year old kid with nothing in the bank, I flew home that afternoon scared to death…It was a long, miserable weekend waiting for the next week’s open, but nevertheless, I reminded myself, “You never know in this stuff. It might just open higher on Monday”.

But, hey, this is a BRUTAL and unforgiving business and a higher opening was not even remotely in the cards…On Monday, I got to the office early, and performed the then precious metals ritual of checking the London AM Gold Fix…As there were no limits on the London Metals Exchange, Gold had settled (fixed) at $42.00 lower, meaning our market in New York would be opening locked limit down the $25 limit…Meaning, you still couldn’t get out if you wanted to! I didn’t have a clue what to do, but what I did have to do was call the two guys I had who were still long the market…I will NEVER forget it, and a quarter century later it is laughable to think about, but as I picked up the phone, my arms and hands were shaking so badly…and I mean literally shaking…that I was almost unable to punch the correct keys to dial the number…After a four day $6200 hit, in a couple of not even $10,000 accounts, I was calling at 8:00 AM to wake these guys with the news they were out another $4200 on this wonderful Monday morning…and even then, I didn’t know if I could get them out, or if they would be able to pay for the loss…I was embarrassed, I felt stupid and  incompetent and I was petrified that I was going to be owing Merrill Lynch maybe $25,000 that they couldn’t pay…I’ll be sixty years old this month and that is easily the most mentally shaken I have ever been in my life. Even though I have since been through some FAR bigger disasters (like once personally dropping $250K in less than six weeks)  I have never been so frightened as I was when I had to pick up the phone and tell those guys the situation, and also, that I, the supposed professional, had no idea as to what we/they should do…or even could do.

As it was, one of the older brokers in the office told me how we could get out, by using the spot market to “leg out” of the trade, and we did so, down $42 on the day, meaning more than $10,000 per contract losses for each of those two last clients…In the end, they were both willing and able to pay, and by the next day, the money had been wired in and I was off the hook. All of my clients had lost everything they had in house, and then more than that for some of them…and I, blown away and bewildered, left that Tuesday afternoon  to drive home to “Mommy and Daddy” in Florida, tail between my legs, having decided the futures business was just a bit more than I could handle. I was going to find something else to do with my life.

However, there is something in my chemistry that has always allowed me to bounce back from just about anything…or maybe I’m just a stubborn dumbass…and by the upcoming weekend, I had recovered from my shellshock, had decided it was possible to succeed in the markets, and I drove back to Atlanta with a new outlook about the business, that included, among other things:

 1. Following my natural bent towards taking “unpopular” positions…not those that “everybody” agrees on, and which frankly, are a hell of a lot easier to sell…
 2.  That I would make risk management much more of a priority, which led to my absolute preference for owning options
 3.That I would try to concentrate on self generated ideas with a longer term (6-9 month) perspective.

Ok, that’s the little war tale, and the truth is, the numbers involved are meager compared to some of the s-h-i-t I have since encountered (and successes too) but the point of this little story really isn’t the possible small entertainment it might provide…It’s this…Gold has now dropped about $110 an ounce in the last 5 trading days…or a little less than 9%. During my little horror show back in 1983, it fell almost 20% in six trading days…I DON’T KNOW WHAT IS GOING TO HAPPEN HERE. I NEVER DO…All I really do is take calculated risks on semi-educated guesses and I would now offer that Gold, today, might easily only be at the “Wednesday” or “Thursday” stage in the story told above (an on the chart below) and there is NO telling where this current sell off might end, nor how fast it can do so…Yes, maybe I’m dead wrong and gold is about to go straight back up but I’m sticking with the short side…and STILL putting on new shorts…and I think it is well within the limits of possibilities that we will see at least one $100+ down day and that the first real stop on this sell off will be somewhere past that magic $1000 number I’m seeing all sorts of experts tout as “strong support”...Aside from the lessons I learned back in 1983, and many since (and many times, unfortunately, over and over) is that in this business, ANYTHING can happen, ANY time, in ANY market, and right now, having just watched about ten TV ads on, “How to buy gold”, in less than an hour, I just can’t help but believe I’m on the right side of this thing.

The world is NOT falling apart. We HAVE turned the corner. The Dollar is NOT going to hell. Hyperinflation is just a concept, NOT a real worldwide possibility. Gold is NOT going to replace the currency system (what a joke, really)…And Gold is, I believe absolutely in “Lala Land”. After doing some voodoo chart work, my real first major target is about $875 an ounce…and again…maybe in a real big hurry.

I would also add that there actually might be more leverage in Silver, which is at $17.50 an ounce, and I believe, will end up back around/under $10.00.

Call me if you’re interested…or just liked the story…or remember being a part of it…

Sending this out unedited so excuse any errors…

Regards,

Bill

866-578-1001

770-425-7241

A week in hell…1983