|
Below we see the chart of silver (weekly basis) from its peak in
March 2008. Clearly drawn is a triangle which is almost
ascending. (The top line would have to be horizontal.) We can
regard it either as an ascending triangle or a symmetrical triangle.
This triangle broke out on Sept. 3.
A
triangle is often called a coil in technical analysis because it suggests a
spring being compressed so that it is ready to move rapidly in the opposite
direction. A triangle is also a consolidation formation. This
means that the odds are, even before the breakout, that after the triangle is
over the good will continue to move in the same direction it moved before the
triangle started. We can imagine a major term bullish force dominating
before the triangle; then an intermediate bearish force enters and balances
the bullish force for a while (giving us basically a sideways market).
When the upper line of the triangle is penetrated, this is a sign that the
bearish force has been overcome and that the major term uptrend will resume.
Chart
patterns such as the above are discussed in the book by Edwards and Magee, Technical
Analysis of Stock Trends, and I have found them a very useful tool for
prediction of the markets. Edwards and Magee say that such patterns
have a 70% chance of working out as predicted. And it is possible to
make money on an event when you have a 70% chance of being right on each
trade.
However,
70% is not my style. It requires too conservative a trading
strategy. So I have developed other techniques which increase that
percentage.
My
basic philosophy is that the universe is governed by the law of cause and
effect. This is why science has been so successful in finding out so
many relationships. If B occurs shortly after A occurs and if this
happens again and again and again, it becomes more and more likely that A
causes B. If B continues to occur shortly after A for the indefinite
future, then the probability that this is just luck becomes
infinitesimal. In other words, the cause and effect relationship has,
in practical terms, been proven.
Sad
to say, at this stage of technical analysis there is no interest in looking
for the causes of phenomena. Technicians say, “I don’t care
why it works, but it works.” In my view, this does not past
muster. Most of the knowledge of the human species has been accumulated
by the use of the law of cause and effect. The problem is that, if you
don’t know why it works, then you don’t understand it and will not
be able to design an experiment to accurately test it.
Chart
patterns do work, although the original chartists could not tell us
why. However, I have solved that problem. It must be kept in mind
that the speculator makes his money by correctly valuing economic
goods. Since the future value of goods is always uncertain, all that it
is necessary for the winning speculator to do is to come closer to predicting
future events than the other speculators. In other words, the winning
speculator predicts the markets better than the other speculators.
In
words of one syllable, we need to look for areas where the vast majority of
other speculators are irrational. Is there such an area?
Fortunately,
there is. About 800 years ago, the philosopher Thomas Aquinas taught
that every economic good has a fair price. The fair price is the price
which allows the merchant who sells it to make enough money that he is able
to live in the style fitting to his profession and station in life.
Unfortunately, this is not a clear definition. Who decides what style
and which station in life? And after this has been decided, what if the
market does not provide him with enough profits to enjoy this life
style? He can protest all that he wants. He can shout,
“unfair, unfair.” But that will not give him the life style
he wants.
Fortunately
for the science of economics, Adam Smith came along 6 centuries later and
pointed out that there was no such thing as a fair price. All there was
was the price agreed upon by buyer and seller. If they both agreed to
it, who has the authority to say that it is not fair?
And
fortunately for us rational speculators the vast majority of the people
trading the markets have, to this day, not read Adam Smith. They are
back in the 12th century with Thomas Acquinas arguing that every
good has a fair price. But as we have seen, there is no fair price, and
they do not know how to find it.
So
what do all these people who believe in the fair price do? They
substitute the price which stands out in their minds. For example, if a
commodity moves sideways for a long time, then many people assume that this
price is the fair price (e.g., gold at $1,000/oz. from March ’08 to
October ’09 or silver at $20/oz. from March ’08 to
‘September ’10). Many traders then assume that this is the
fair price. If the good then moves up, short term traders will conclude
that it is too high. Some will back away from their buying.
Others will take profits. This diminished buying and increased selling
will cause a down move which, son-of-a-gun, takes the good back down to the
believed fair price. In the case of gold, this “fair”
price, as noted, was $1,000. It moved up from $1,000 to $1,225 (Dec.
2009), and there was then a down move which took gold back down to $1,050
(Feb. 2010). This was unusual in that this gold bottom did not go all
the way down to $1,000. Experienced chartists know that something like
95% of all such down moves will carry all the way back to the
“fair” price. The existence of that 50 point gap stands out
like a sore thumb. And the experienced chartist understands that this
gap was caused by the major term bullish force, which distorted the normal
pull back in a bullish direction. That 50 point gap is a giant, long
term signal that this major term gold bull market is unusually
powerful. And the way we know this to be true is via the theory of the
fair price.
In
the same way, after an advance in silver there will probably be a down move
back to the $20 level (perhaps slightly lower because the
“horizontal” line of the triangle is actually slanting slightly
downward). If this down move holds above the expected pull back point
(slightly lower than $20), then this will confirm the very strong signal in
gold, and we will be able to predict an extremely strong major term bull move
in the precious metals for the foreseeable future (meaning until we get a
signal of a major term top).
In
a similar manner, this mistaken belief that there is such a thing as a fair
price causes the kinds of moves in technical charts which were discovered
empirically by Edwards and Magee and which are known as charting
theory. Although Edwards and Magee did not know the cause of these
moves, their cause is the fact that the overwhelming majority of traders believe
the medieval economics of Thomas Aquinas and have still not learned the
modern economics of Adam Smith.
One
might note that Adam Smith published Wealth of Nations in 1776, well
over 200 years ago. Isn’t it about time that people learned which
side is up? Every time they make one of these mistakes they lose money
to seasoned chartists like me. They lose, and they lose and they lose,
but they never learn. Some of them are so stupid that, when they lose,
they do not even know it. Suppose an “investor” buys a 20
year bond for par and redeems it at the end of the 20 years (again at
par). He has received a yield on the bond, but this yield has been
offset by the depreciation of the currency. He has lost real
value. But since he has gained value in nominal dollars (like the
starving people of Zimbabwe), he thinks he is a winner.
You
may have met this guy. He was just ahead of you the last time you
walked into the convenience store. He bought a lottery ticket, and the
machine told him, “You’re a winner.” Not so.
The machine lies. He is a loser, and he will probably be a loser for
the rest of his life. Fortunately, there are a great many suckers
(believers in Thomas Aquinas) around, enough to last for your and my
lifetime. That is why you and I do not have to work for a living.
All
chart patterns have what is called a price objective, that is, a point
representing the minimum advance or decline once the pattern breaks
out. However, for triangles the minimum objective is not a point.
It is a line. This line is drawn from the beginning of the triangle (at
$21 in March 2008) parallel to the bottom (ascending) line of the triangle.
What
is astonishing about the precious metals group is that several major indexes
have almost the exact same triangle. The HUI has it. The XAU has
it. Several of the individual gold stocks have it. All of these
patterns reinforce each other. But since the patterns are appearing in
so many instruments and the probability of each succeeding is 70%, then the
resulting probability is far higher. What is even more astounding is
that the price objective lines are very steep, implying a rapid
advance. For example, the price objective line in silver (p. 1) started
from 21 in March 2008 and is advancing at a rate of about 50% per year.
It is currently at $60. A year from now it will be at $90. We can
not say when silver will hit its price objective line, but the longer it
takes to hit it the higher it will be at the time.
Right
now two of these triangles have broken out (gold in Oct. 2009 and silver a
week ago). Since this predicts that both of these goods will advance,
they will also drag along many of the individual gold stocks.
Therefore, it is a slam-dunk that the XAU, the HUI and most of the individual
gold/silver stocks will also break their patterns to the upside. In
short, things are shaping up for a massive move in the entire precious metals
group, and this move is entirely consistent with the fact that the Federal
Reserve has more than doubled the U.S. money supply over the past 2
years. Just to put this in context, over the 1970s the U.S. money
supply almost doubled over a period of 10 years (about 7% increase per
year). By 1979, the Consumer Price Index rose by 13.3%, and in that
year the price of gold multiplied by 3.8 times. I am not yet ready to
make a firm prediction for the gold price a few years hence, but my basic
sense is that it is going to surprise everyone to the up side.
Howard Katz
The Gold Speculator
Howard S. Katz is
the editor/publisher of the One-handed Economist, a financial letter which
combines fundamental and technical analysis. He was a bug on gold in the
1970s and became a bug on gold again in late 2002.
Subscribe to the Gold
Speculator (the One Handed Economist)
You can subscribe
to Howard Katz’s thoughts on commodities, stocks, bonds and real estate
are available in a letter entitled The One-handed Economist and published
every two weeks giving specific advice on trades in stocks and futures. This
letter is available (both electronic and paper copy) for $300/year with a
3-month trial for $100. Send to: The One-handed Economist, 614 Nashua St.
#122, Milford, N.H. 03055.(Include both electronic and mailing address.)
|
