|
THE
BUBBLE IN SILVER
Silver is a friend of mine.
I can play him anytime.
He is outperforming gold.
Exciting story does unfold.
And when the time comes round to sell,
Silver will be doing well.
I’ll call my broker with great ease
And tell him “sell now if you please.”
The broker, he to me will say,
“Is this an order for the day?
Is there a limit on the price?
Cause that would not be very nice.”
Now 30 years ago a raid,
Old Bunker Hunt a corner made.
He said, “My flag is now unfurled.
I’ll buy all silver in the world.’
He bought the whole world’s silverware.
He was a bull and not a bear.
Yes, knives and forks and silver plate,
With destiny he had a date.
Then Bunker Hunt, he tried to squeeze
The shorts. He had them on their knees.
But then the shorts struck back you know,
And Bunker Hunt lost all his dough.
from the One-handed Economist,
10-1-10.
Ah,
yes, the silver bubble of 1978-80 was a time to remember in financial
history. Bunker Hunt, heir to the H.L. Hunt fortune, became an
aggressive bull on silver and tried to engineer a silver corner. But no
one has ever engineered a corner on a free market, and Bunker Hunt did not
become the first. He stayed too long. He overplayed his
hand. And when the bubble collapsed, he lost his daddy’s fortune.
WHAT
IS A SPECULATOR?
This
article is dedicated to those who are, or would become, successful
speculators. So we begin, as usual, by asking what is a speculator?
A speculator is a person who tries to make money on his capital
by buying low and selling high. This is as distinct from an investor,
who tries to make money on his capital by using it to make real interest (or
return on capital). The speculator lives and dies by price
fluctuations. The investor is unconcerned about them. If he is in
bonds, he wants the yield. If he is in stocks, he wants the
earnings. If he is in real estate, he wants the rent.
Now
here is the secret to successful speculation. All markets hit their
lows when traders are most bearish. (A trader is either a speculator or
an investor.) They hit their highs when traders are most bullish.
A case of the first is the 1999 low in gold when even the gold mines were
selling short on their own product. A case of the second is the Jan.
21, 1980 spike top, when gold hit $875/oz. (interday on the Comex).
The
difficulty here is that man is a social animal. He is influenced in his
beliefs by the people around him. But the person who allows himself to
be so influenced in the markets is a loser. He sells at the low and
buys at the high.
So
the first virtue needed to be a successful speculator is an independent mind.
The
job of the speculator is to figure out when there are either over valuations
or under valuations in a market, and to do this, as noted, he must go against
the people around him. That is, he must figure out when the people
around him are wrong.
Here
we must take a new tack. It is often stated that the man who is most
successful in life is the one who has the best information. This is,
unfortunately, a bad mistake. It ignores the fact that
“information” comes in two types. There is concrete
information, which is information about specific things, and abstract
information, which is information true of things in general. For
example, “The Allies defeated the Axis in World War II” is
concrete information. “Man is the rational animal” is
abstract information. It applies to all men and says that they have the
capacity to reason.
The
difference between abstract information and concrete information is
crucial. Concrete information tells us about one (or a few) specific
thing(s). Abstract information tells us about all of a certain
type of entity. For example, Newton’s Law says:
Every object in a state of uniform motion tends to remain in
that state of motion unless an external force is applied to it.
This
is true for any object in motion. It is true for all the objects now in
motion. It is true for all the objects which have been in motion.
And it is true for all the objects which will be in motion in the future.
While
someone might tell you, “The car came down the road very
rapidly,” this is true for only one car in a specific time and
place. But Newton’s Law is true for all moving objects in all
times. So abstract information is far more powerful than concrete
information. Thus we have to correct the above statement. The
man who is most successful in life is the one who holds his information in
the most abstract form. And since the widest abstractions are those
discussed in philosophy, it is to philosophy we must turn for the solution of
our most important problems.
Very
well, what does philosophy have to say about economics and speculation in the
markets? The answer is that the philosopher Thomas Aquinas taught that
every good has a fair price. This was defined as the price which
allowed the merchant (who sold it) to live at a standard appropriate to his
status in the community.
Since
community standards are subjective, the followers of Aquinas do not have an
objective standard of a fair price. They therefore take the price to
which they are accustomed, the price that stands out in their minds.
This could be an important high or low or it could be a long, sideways period
during which time many people traded.
For
example, an important high in gold was $1,000 in March 2008. When gold
broke above this number in October 2009, people started to feel that gold was
too high. By the time that gold got to $1,225 in December 2009, this
feeling had gotten strong enough that it led to the 2 month reaction of early
Dec. 2009 to early Feb. 2010. Most of the time such reactions take us
right back to the “fair” price. Hence, one could predict a
decline in gold from $1,225 to $1,000. However, in this case the
decline only carried to $1,050. As small as it was, this $50 gap
(between the actual price and the predicted price) tells us that there is a
powerful bullish long term force on the gold market.
An
important high in silver was $21, also in March 2008. This has been
considered the fair price by a great many traders for the past 2½
years. It thus provided resistance every time silver approached that
number. But two weeks ago, with the aid of the long term trend, silver
broke above $21, and this means that the old resistance is replaced by
support. (Prior to late September, $21 was the high of the
“fair” price range. But now that it has been penetrated
many people will start to think of it as the low of the fair price
range. They will therefore buy on any dip to $21. $21 therefore
becomes a key number for silver. It is now a great place to buy.
And if (which is not likely) silver falls below $21, then this is a caution
sign which would probably lead us to take profits. Therefore, there is
sort of a floor beneath silver at the present time. Any loss will be
small; yet there is the opportunity for large profits. Consider, for
the past 2½ years silver has moved sideways while gold advanced
25%. Yet, in the longer term gold and silver move together. It
therefore follows that however much gold goes up over the foreseeable future,
silver will go up 25% more. Over the past 5 weeks, silver has gotten off
to a good start: up 22% (Aug. 24 to Oct. 1).
CONTRARY OPINION
Adolph
Ochs, the founder of the (modern) New York Times, was a gold
bug. However, Floyd Norris of the current-day New York Times is
most definitely not a gold bug, He writes in Saturday’s
paper:
“Americans
became more pessimistic about their chances for higher incomes during the
Great Recession than at any time in the past 45 years.”
“Recession
May Be over, but Consumer Pessimism Is Still Plumbing New Depths,” NYT,
Floyd Norris, 10-2-10, p. B-3.
The article goes on, thinking
it is discussing the economy, but whenever a fact about the economy is
required, Mr. Norris substitutes an opinion for the fact. For example,
Americans may be more pessimistic about higher incomes, but that does not
prove that their incomes are going down. For that we need facts about
income, not opinions.
This
is a standard technique in today’s media. Run an article to
influence people’s opinions. Then take a poll (which will show
what you want it to because there will always be a few people who are
influenced by your article). Then cite the poll as though it were a
fact. Using this technique we could prove that Columbus never
discovered America because a poll taken at the time showed that the vast
majority thought he would sail off the edge of the earth.
For
example, as a result of a massive campaign of lying by the New York Times
back in 2008, most of the people in the world have accepted the opinion that
the world is headed for a decline in prices. But the actual reality is
that we are headed for a massive rise in prices. As a result, most of
the speculators in the financial markets are expecting the exact wrong
thing. If you want to take their money, you have to play for prices
rising. (And indeed, the current rise in the CRB is the first step of
the coming rise in the Consumer Price Index.)
As I have noted, the New York Times came up with the idea
early in the century that the DJI was going to 36,000. They became so
excited by this idea that they bought their own stock circa $40 per
share. In 2009, it declined to $4 per share. This was only one of
many disastrous errors which cost Times readers enormous amounts of
money. How many times do they have to do you before you wake up and realize
that you have been made a sucker?
It
is only a minor exaggeration to say that everything we have been taught is a
lie, and all of the approved authority figures are a collection of confidence
men and frauds. This is why so many people are wrong on the markets
over and over and over.
If
you would like to become a winning speculator, I write a fortnightly (every
two weeks) financial letter, the One-handed Economist, to explain the
proper principles of rational speculation. There are few economists in
the country who can equal my record. I was a gold bug in 1970 (with
gold at $35/oz.). I turned bearish on gold a day after the top (at
$800/oz.). I then became a stock bug in 1982 (DJI 800). I
predicted Black Monday 1987 and then turned bullish again until 2007.
Over the past 11 years, my Model Conservative Portfolio has more than doubled
in value.
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.)
|
