Trend following explained and applied to silver's Brexit jump...
CHECK OUT these headlines from the past few days, says trend-following money manager, author and tutor Michael Covel in Addison Wiggin's Daily Reckoning.
- "Silver sets the pace as precious metals surge after Brexit" – Financial Times
- "Silver Outshines Gold in Brexit Precious Metals Rally" – Wall Street Journal
- "Silver Is Going Nuts" – Business Insider
Sounds like you could have made a killing if you placed a bet on silver ahead of the Brexit vote.
But what those headlines don't tell you is that you could have made twice as much money on silver with less risk if you were a trend follower...
Silver has had a big rally since the Brits chose to leave the EU. The market reaction's been a traditional "risk off/safety on" move.
Global stock markets dropped on the uncertainty of Brexit, while safe-havens like the US Dollar, gold and silver shot higher.
This is the kind of story the financial media loves to blather about.
A major global event spiking big market moves is ratings gold.
The reality? Gamblers posing as investors made bets on either side...
Some make a killing...
Others get wiped out...
It all sounds so sexy – the chance for instant lottery riches.
That makes for a great narrative and hyperbolic headlines help bolster the fantasy. But this storyline tells you squat about getting rich as a smart investor.
See, you can't make money just following the news cycle.
Price is what creates the news, not the other way around.
The media is talking about silver and gold because they've both rallied in recent weeks.
If they'd tanked, the media would be talking about something else.
So if you're just following the news, you'll always be late to the party.
Look, there's no doubt that Brexit is responsible for the recent silver rally. But silver's been trending up far longer than just a couple of weeks.
I know steady gains over longer stretches of time don't make for riveting CNBC teleprompter copy.
But those longer-term trends sure as hell make for fat profits.
And if you weren't aboard the silver uptrend that formed months before Brexit, you left a lot of opportunity on the table.
Had you bought silver in anticipation of Brexit, you'd be up 12%.
Congratulations to you, but try replicating that feat with consistency. Mathematics and history dictate that you will not.
But if you are a trend follower, you know that silver has been in an uptrend far longer than the recent headlines reveal.
In fact, I recommended the iShares Silver Trust as part of a trend-following approach back in April. And if you bought then, you've seen nearly double the return compared to schizophrenic Brexit gamblers.
Why were we able to nearly double up the lucky casino junkies?
Well, trend following systems like mine are designed to identify already established trends that tend to get a big boost when unexpected market events happen.
Trend trader Michael Rulle explains trend following's success during uncertain times:
"For markets to move in tandem, there has to be a common perception or consensus about economic conditions that drives it. When a major event occurs in the middle of such a consensus, such as the Russian debt default of August 1998, the terrorist attacks of September 11, 2001, or the corporate accounting scandals of 2002 [and the 2008 equity market crash], it will often accelerate existing trends already in place...events do not happen in a vacuum...This is the reason trend following rarely gets caught on the wrong side of an event."
The bottom line is trend following puts you on the right side of the big trends, such as the current trends in gold and silver.
Stay with the precious metals trend...until it changes. Nobody knows how high gold and silver could go.
Our system may not be sexy, and it might not tell you "why" moves are happening, but it can make you rich.