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If you want to understand the great mass of investors, you don’t need to
spend hours reading a book written about a hundred years ago, the best way
way to do it is to treat yourself to some time watching sheep. You can even
make something of a vacation of it by going along to a sheep dog trial, such
as the classic ones held on the English – Welsh borders in the heart of sheep
country or in New Zealand. It’s a fun day out and you can learn from chatting
with the farmers, and more to the point, you can learn a lot about investors
by watching the sheepdogs and the sheep – all you have to remember is that
the sheepdogs are the Smart Money and the sheep represent the great mass of
investors, the so-called Dumb Money. If you do go to the sheepdog trials on
the English – Welsh borders , remember to tag on a day or two to visit nearby
Hay-on-Wye
which is stuffed full of secondhand bookshops where you can find some great
old books, and mercifully very few of them are written in Welsh.
Fortunately, we can readily identify the sheepdogs and the
sheep on our COT charts, the sheepdogs are the purple bars on our charts, the
Commercials, who take the other side of the trade from the sheep, who are the
blue bars, the Large Specs. Let’s now look at a pair of charts, a 1-year
chart for silver itself with the COT chart stacked directly below it, which
is for 1-year too, in order to see how the sheep are always wrong. As we can
see the sheep, the Large Specs (blue bars) always have their biggest long
positions at or just ahead of peaks in the silver price. This is not rocket
science is it – to assist you in grasping this, an appropriate number of
right and wrong labels have been added to the chart. While the obvious
conclusion from this is that the Large Specs are just plain stupid, dumber than the dumbest
jackass, as pragmatic speculators we do not waste our time condemning
them, rather, we simply make sure that we are the opposite side of the trade
from these clowns, and if they are going short silver to a significant
degree, as they did last week, then we are going to make darn sure that we
are long. If we are a little too early, and silver drops some more, then so
what? The entire financial system is set to blow to smithereens before much
longer, and the Emerging Markets collapse is just the start of it – the
periphery is burning and the firestorm will soon spread towards the center.
When that happens there are going to be “precious” few hiding places, and the
Precious Metals sector will be one of the only boltholes around. Before
leaving these charts it is also worth noting that the Commercials went
long silver for the 1st time since 2001 last week and if that isn’t a
sign of an imminent bullmarket, then I don’t know what is. Incidentally, with
respect to the classic 1948 goldbugs film with Humphrey Bogart “Treasure of
the Sierra Madre”, those of you who play casino slot machines may not realize
that the refrain “Bonus? – we don’t need no stinking bonus!” that the “My Caramba”
machine says in a thick Mexican accent when the bonus is cut short, is
actually inspired by the Badges?
– we don’t need no stinking badges! scene in the “Treasure of the Sierra
Madre”, but I digress…
 
Click on chart to popup a larger, clearer version. The net
Commercial Hedgers chart is also unprecedentedly bullish, as it shows that
this is the 1st time during the life of this chart, i.e for the past 25 years
at least, that they have held a net long position – put simply it doesn’t get
any better than this…
Click on chart to popup a larger, clearer version. Chart
courtesy of sentimentrader.com The 6-month chart for silver shows recent
action in more detail. On this chart we can see that last week’s dip brought
the silver price back close to its mid-August lows, with which it is
suspected to be forming a small Double Bottom, and a bullish looking
“inverted hammer” candle appeared on Friday, so we might be right at the
bottom here.
Finally, unlike back in the Spring, gold’s latest COT
chart is also very bullish…
As mentioned on some of these charts, if the outlook for
gold and silver is so positive, then it means that the dollar’s “wrecking
ball” rally is about done. So, after looking for evidence that it is, we have
this…
This monthly chart for dollar proxy UUP shows a bearish
monthly “shooting star” for the month of August and money flow becoming
negative in recent weeks, indicating that Smart Money have been taking
profits in dollar trades. It also shows a big ugly potential Broadening Top.
According to this chart the dollar is about to turn lower. It is also worth
noting that the Accumulation chart for UUP on its daily chart has been
extremely weak on this rally.
The conclusion to all this is that the coast is clear to accumulate the PM
sector – even if the sector drops more, it is unlikely to be by much. That’s
what Smart Money is already doing, and they are going to be sitting pretty
and not have to give chase if the sector goes roaring up. At this juncture it
is probably best in general to accumulate the large to mid-caps, since they
are unlikely to drop much more if the sector grinds a bit lower, whereas as
we know, some juniors can easily get another 30% lopped off their prices if
the sector goes nowhere and there is no positive news out of the individual
companies. We will accordingly be reviewing the charts for a range of large
and mid-cap gold and silver stocks as a matter of priority going forward.
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