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1. If there is a flow of capital that portrays the
current mindset of the average global investor perfectly, it is likely the
incredible demand for so-called “risk-free” investments.
2. “If the
last two weeks are any indication of how next year will start, there’s
near-insatiable demand….We have a significantly shrinking supply of
risk-free assets in the world and U.S. Treasuries are one of the few
left.” - Ira Jersey, interest-rate strategist at Credit Suisse
Group AG, in an interview with Bloomberg News, Dec 21, 2011.
3. Ira is referring to the incredible demand for US
Treasuries and T-Bills. Amongst
hedge funds and the public, the European crisis has ignited a surge in dollar
bullishness and euro bearishness.
4. Click this Bloomberg bid-to-cover ratio chart for United
States 4 week T-bills. You are
looking at a spike in the ratio to a
mindboggling level of 9:1. A
ratio of 2:1 is considered successful.
A 9:1 ratio, especially given the fact that these bills pay absolutely no interest, shows you the incredible
level of investor fear that exists around the world.
5. The longer term T-bonds showed a 3:1 bid-to-cover
ratio in the latest auction, indicating powerful demand from terrified
investors who want to avoid risk.
These investors will clearly pay
any yield penalty to get perceived safety for the bulk of their capital.
6. Please keep in mind that there are two sides to
every trade; for every seller of a euro, somebody has to be a buyer, or there
is no trade. Talk and analysis
about where the euro is going should always play second fiddle to liquidity
flows studies.
7. Click this euro liquidity flows chart from
sentimentrader.com now. Hedge
funds are generally not as heavily capitalized as the commercial traders
(banks) are. They buy most of
their leverage from the banks, who are on the other
side of their trades quite often.
That’s not a good situation to be in, if you are a hedge fund.
8. When your bookie is on the other side of your trades
consistently, you have to realize you might be classified by your bookie as a
mark, rather than a customer.
9. The fund managers are aware of the bookie-gambler
relationship, but hope that they can make a “big score” with
their leveraged play, and get out before the deep-pocketed commercial traders
reverse the trend with their gargantuan buying. Enormous leverage brings huge risk,
but if a fund can call a really big move, the profits made can be many
billions of dollars.
10. A lot of hedge funds definitely have a lot of paper
profits now from shorting the euro, but greed is a very powerful emotion, and
hedge funds have a tendency to overstay their time on many trades.
11. What a lot of amateur
investors don’t understand is that the banks and prime brokers often
continuously loan more capital to the funds to enlarge their positions. As the funds “add to a
winner”, the fact is that it doesn’t take that much of a reversal
in price to cause a dramatic reduction in the net liquidation value of their
positions.
12. If you look at the red and blue circles that I have
drawn on that euro COT report chart, you can see that the public is at record
levels of bearishness on the euro, for the life of this chart. The funds are also very bearish, while
the deep-pocketed commercials are holding a record bullish stance.
13. You can also see that by looking at previous major
peaks and lows, you can create a “liquidity flows report card”,
and it is the commercial traders that get an A grade, and I would vehemently
argue that the funds and retail investors get failing grades.
14. Will this time be different? Will the funds get an A grade while
the commercials bust out? I
don’t think so. It’s
exciting to call a big turn, but I’m not so sure that action builds any
lasting wealth. I like to see you
focused on flowing capital slowly and surely into assets as their price
declines, as the enormous commercial traders do the same.
15. It’s important to understand that all the
euros sold by one group of traders are bought by another. It is commercial traders that are
buying euros, and leveraged speculators with “less-than-stellar”
historical report cards who are selling and shorting
them. Will the gambler beat the
bookie? Personally, I don’t bet against the house.
16. The commercial traders are taking the silver, gold,
and euro birds in the hand, while selling the funds and public great stories
about future dollar birds in the bush.
Follow commercial liquidity flows, slowly but surely, to build
consistent wealth.
17. Click this GDX oscillator cycle chart. From time to time I urge you to view
technical indicators in “solo mode”, without the price
chart. In this case, I’ve
run the chart back about 3 years, so you can see the repetitive up and down
cycles that repeat virtually endlessly.
18. There are many factors in play for gold stocks right
now, and these oscillators add more weight to the bull side of the case. You can see that these cyclical
oscillators are all near the bottom of the chart, and historically such
positioning is almost always followed by move to the upper area.
19. Without even looking at price, you could buy gold
stocks blindly here (with limited capital, obviously), just based on the
historical pattern of these
oscillators. These
oscillators won’t get you to GDX $100 a share, but they should get GDX
out of the starting gate very quickly.
20. The primary theme of an epic crisis is surprise, yet
most investors refuse to accept that fact, and many become shrill and
maniacal in their belief that they can predict their way through the crisis,
or find gurus who can, rather than simply flowing their liquidity slowly and
professionally in response to price action on the grid.
21. Click this key GDX weekly price chart. Yelling and screaming that bullish analysts
failed because GDX is just sitting in the current price “box”
will not get you through this crisis.
Take a hard look at that chart and think about what has transpired in
the background.
22. The GDX price burst out of a big head and shoulders
bottom, and “should” have gone on to much higher prices. It tried, not just once, but a number of times. Price did burst above the black h&s neckline I’ve drawn on the chart, but
surprise situations like the implosion of Europe were generally
unpredictable. GDX held up quite
well in 2011 considering that Europe almost collapsed.
23. Surprise, not prediction, rules the GDX chart, in a
debt crisis of this incredible size.
You can only respond to negative surprise by buying and/or
enduring. The bottom technical
line is that the big h&s pattern is still
intact, and the rectangular trading range that has appeared does have a 2/3
chance of breaking out to the upside.
24. Think hard about whether taking the other side of
the commercial trade in the euro right now is really a good wealth building
idea. Maybe you have the capital
to beat the bookies with a leveraged long dollar play. I’m less sure that you do, and
doubt that any gains will be retained.
My suggestion is that you adopt and embrace surprise as a central
theme of this debt crisis.
Refusal to do so has already cost most investors their confidence and
a great loss of capital. Maintain
a big picture view that gold will be the last man standing, and buy what you
can in GDX, GDXJ, and individual gold stocks on all price decline
surprises. Take a good second
look at my GDX oscillator chart.
The surprise now would be price weakness, and I’m prepared to
buy such a surprise to a degree that few understand, but the odds are that we
blast higher in gold stocks, here and now!
Special Offer For Website Readers: Send me an email to freereports4@gracelandupdates.com
and I’ll send you my free “Junior Oscillators In Play Now!”
report. I’ll show you some
junior precious metals stocks that look poised to outperform GDX right now!
Thanks!
Cheers
St
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