Gold is known for having lackluster summers. Still, we have not yet had a down year in the bull market that started in 2001 and one of these years we may have a down year — and still be in a bull market. I still think we are going in the neighborhood of $4,000 on bullion, but not in a straight line!

Why do I think gold may decline some more?

Silver is underperforming gold bullion, junior gold stocks are underperforming large-cap gold stocks, and unhedged gold stocks as measured by the AMEX Gold Bug Index (HUI) are slightly underperforming the PHLX Gold and Silver Index (XUI). Basically, high-beta high-risk gold plays are underperforming lower-risk precious metals plays.

Those gold corrections are as natural as you can see in the table below showing the year and the high and low for gold prices:

2009    $1226.40-$801.50 (a range of $424.90)

2008    $1033.90-$681.00 (a range of $352.09)

2007    $848.00-$603.00 (a range of $245.00)

2006    $730.40-$503.80 (a range of $226.60)

2005    $541.00-$411.40 (a range of $129.60)

2004    $455.90-$371.30 (a range of $84.60)

2003    $418.00-$322.10 (a range of $95.90)

2002    $350.50-$276.70 (a range of $73.80)

2001    $294.00-$255.00 (a range of $39.00)

The yearly percentage ranges are increasing — this is normal as the bull market is nearing the acceptance stage. The actual dollar ranges are also increasing, but this is a function of the higher price. I am highly confident that by the time this bull market is over we will have a $1000 increase within the next five years.

But that does not mean you should be buying call options on gold or gold stocks — this is a tactical short-term trading strategy — to capitalize on a long-term bull market (a more strategic view of bullion).

Clearly, the table above suggests that an aggressive trader can make money both on up and down moves in gold bullion. The worst thing one can do is mix up the long- and short-term views and lose money. Don’t sell your SPDR Gold Trust (NYSE: GLD), but also don’t be surprised if it pulls back; gold can go to $900 to $1000 based on the ranges suggested in the table above.

I had to witness something truly moronic in 2008 where a so-called expert kept buying call options on either GDX or GLD and kept losing money hand over fist (see chart above) as the market was cascading lower.

You don’t buy call options if you have a bullish long-term view. Calls, or puts for that matter, are for short-term tactical trading. Mixing tactical trading with long-term views results in fighting the tape — and big losses — which my good friend Eliot wasted a good six inches of actual tape to illustrate way back in 2002. I don’t enjoy losses, but they do happen. However, if they can be avoided, I am of the opinion that they should be avoided.

Why Suggest a Mini Silver Put Bonanza, But Not Gold?

I saw this correction in bullion and I bit my lips to nudge people to short some silver or silver stocks. I know that gold is religion; you don’t short it unless you like receiving hate mail if you make money.

This is not how investing works, but gold is a special case in many investors’ minds. It should not be problem to have tactical trades around a strategic position, but somehow there is a big problem in doing so with gold.

The only way to manage this mass psychosis with gold bullion is to buy some physical bullion from www.kitco.com and forget about guilt if you make some money shorting the “paper” (this is the correct gold bug lingo), if and when the opportunity presents itself.

Now, the Sprott Physical Trust (NYSE: PHYS) currently trades at an 8.7% premium to physical bullion. It has traded as low as 3.0% over its short history, but it has never traded at a discount. Discount pricing is possible, however, as this is similar to closed end-fund that can be redeemed under certain conditions.

So, if PHYS goes discount, buy it with both hands. In the meantime, prepare a shopping list for your favorite gold stocks.

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