How to Trade Fear and Uncertainty

We are experiencing three events that have fed each other, and this interaction
has turned each event into a crisis. And while each crisis is contributing to
uncertainty and sharp market declines in their own way, they have one thing in
common: They are underpinning fear and uncertainty. Europe: The European debt
crisis is going to last a long time, but daily changes in the European bond
markets and daily conclusions by analysts who can do second-grade math
understand that Europe does isn't undergoing a liquidity crisis that is
manageable, but rather a solvency crisis that is not. Europe's crisis has made
a three-fold contribution to the market selloff – headlines on political
decisiveness triggering selling, margin calls on bondholders triggering selling,
and math that says this is going to last a long time, keeping buyers out of the
market. The U.S. Debt Crisis: The political theater leading up to the fake debt
crisis solution now on the table led to the downgrade of U.S. debt by S&P, and
this, in turn, served as a trigger for the market's big selloff. The decline
itself may accelerate the ultimately fruitless discussion about fixing the
deficit and debt issue and that will lead (maybe) to automatic spending cuts and
the messiest presidential election in memory. So Uncle Sam's politicians have
contributed three things to the crisis: the short-term trigger of the debt
downgrade; six months of uncertainty with a messy political debate; and a year
or more, depending on who wins, of more uncertainty about fiscal and tax policy.
The Double-Dip Recession: I have been predicting a double dip since I thought
the official end of the last recession was only on paper. We are essentially in
one now forget the statistics that will be revised anyway. Roughly one in four
Americans would work or would work more if there was a job available. At the
current rate of defaults and foreclosures, it will take another five or six
years to clear the housing mess, stabilize prices and kick off a material
increase in home building. Fiscal stimulus is ending and we are entering a
period of contraction at all levels of government. And the growing certainty
about a double dip is keeping many investors out of the market and chasing
others away at the same time, as they're uncertain about the impact of a
slowdown on corporate profits and market multiples. What do these three crises
have in common? Where do they intersect? Fear and uncertainty – and that is
the trade of the day, the week, the month, the quarter and perhaps all of 2012.
How to play uncertainty and fear You do it the old-fashioned way – precious
metals. I am in gold, silver and cash. Oh, and the gold miners. The ETFs here
are SPDR Gold Shares (NYSE: GLD ), the iShares Silver Trust (NYSE: SLV ), and
the Market Vectors Gold Miners (NYSE: GDX ). I have been recommending this for
subscribers for a long time. And there are two ways to play it. If you want to
protect capital – always my priority – and want consistent returns, either
buy the ETFs and sell covered calls or sell puts. If you want to speculate, you
buy those calls. I do both – I have pots of capital for each focus, monthly
cash and income or speculation. When does this trade end? The inflation adjusted
previous high for gold is roughly $2.400 – a 30% increase from here. The
miners will follow as will silver. If these numbers don't do it for you, ask
yourself the question: Does the next week, month quarter and year look more or
less uncertain than the past week, month quarter or year? The answer says it
all.