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KISS is an acronym for the popular expression, keep it simple,
stupid. I don’t particularly like the idea of calling others
stupid. I have found that people who do so usually have an inability to
express themselves, and this is because they themselves are stupid.
Most people I have met in this world can do at least something better than I
can, and I can benefit from their expertise. (This is what the
economist calls division of labor and specialization.) At any rate, the
simple part is very good. Most great ideas are simple (the 10
Commandments, Newton’s
laws of motion).
This week the One-handed
Economist features a giant double top in the U.S. dollar index, a chart
pattern which completed on Aug. 1, 2009 and has been dominating both the
currency markets and the commodity markets ever since.
 
The first chart
patterns were developed in the early 20th century by the first
technical analysts. These people were not happy with the fundamental
approach because it did not seem to be working very well. They followed
Charles Dow of the Wall Street Journal, who said that we don’t
want to tell the market what it ought to do. Let us sit back and
observe what it actually is doing.
This, of course, is
the first principle of science. When one is confronted with a new
problem, then step back and observe the facts.
Then these first
technicians began to notice patterns in the charts they had been
constructing. When certain patterns would appear, they would be
followed by a bull move. Certain other patterns would be followed by a
bear move. They began to use these patterns to predict the future
behavior of the markets, and their predictions worked. At least the
predictions worked most of the time, and that was good enough to make nice
money.
The double top is a
chart pattern in the shape of the letter M. It completes when the
pattern breaks down below the bottom of the M. It then predicts that
the market will make a further decline equal, in percentage terms, to the
decline from the top of the pattern to the bottom of the M. In the
chart above, this is a decline from 90 to 79, or 12%. Another further
decline of 12% would amount to 9½ points, or 69½.
The early 20th
century technicians never took the step of applying the second principle of
science, organizing the facts observed in accordance with the principle of
cause and effect. What is a reasonable cause and effect analysis which
makes sense of these chart patterns and explains why they work?
I discovered the
answer to this by studying the philosopher Ayn Rand. Miss Rand pointed
out that abstract ideas are the key to understanding the thinking of other
human beings. This is because abstractions are so broad and apply to so
many different possibilities that they cover pretty much everything that can
happen. At the same time, abstractions are simple and can be understood
by pretty much any normal human. If we look at economic abstractions (or
economic philosophy), we find two ideas. In the 12th
century, Thomas Aquinas argued that every good has a fair price and should
trade at its fair price. In the 18th century, Adam Smith
argued that there is no such thing as a fair price, that the only
“fair” price is the price agreed upon by buyer and seller.
Well, Thomas Aquinas
was wrong, but through the Catholic Church he has had a powerful impact on
the thinking of mankind. So even here in the 21st century
most people go around believing in the principle of the fair price.
And since we are
speculators in the markets, it is necessary for us to introduce one more
principle, the principle of Yogi Bear. Yogi Bear was “smarter
than the other bears.” To make money in the markets, we must be
smarter than the other speculators. To do that, we must know what they
are thinking.
What are the other
speculators thinking? They are thinking that the market has to trade at
its “fair” price. But since they don’t really know
what the fair price is, they simply take the price to which they are
accustom, and this price may be deduced by the careful chartist. In the
above chart of the dollar, we can see that 79 is a level about which the
dollar seems to orient itself. We have now returned to 79 for the fifth
time since Dec. 2008. Clearly 79 is perceived as a fair price by many
dollar traders. At the present time, this point acts as a supply level,
and it can be easily seen that the major trend is down.
The early chartists
discovered the concept of a pull-back to support or resistance. When an
economic good has completed a chart pattern, it will make one last move back
to the pattern, back to the price in the pattern which they regard as fair.
It is obviously the supporters of Thomas Aquinas who are doing the
buying. In late November, we can imagine them thinking, “The
dollar [then at 74] is too low. A fair price would be at least
79.” And so it came to be. But now the sense that the
dollar is too low is gone. The followers of Adam Smith are shorting the
blazes out of it. The support at 79, which was effective in May
’09, is gone. It was broken on August 1, 2009.
The experienced
chartist takes a quick look at the weekly basis chart of the U.S. dollar and
immediately sees: RETURN TO RESISTANCE, MASSIVE DOWN TREND. This
sums up the thinking explained above (except for the fact that the
traditional chartist does not know why the pattern works. He only knows
that it does work).
As you know, when the
U.S. dollar falls, gold is highly likely to rise. Even better, since
every country in the world is depreciating its currency (against real goods),
their currencies may be rising against the dollar, but they are falling
against gold. We can therefore say that the corresponding rise in gold
is going to be enormous.
The final scientific
principle, after one has discovered the new facts and related them via cause
and effect, is to test one’s theory by predicting the future behavior
(of the markets). In this regard, technical analysis has it way over
fundamental analysis. Fundamental analysis just does not work. It
seems that it ought to work, but it fails again and again. Each time
the fundamentalist picks himself up and says, “There is nothing wrong
with fundamentalism itself. It was only my analysis which was
faulty. I just have to do a better job next time. Every once in a
while he gets lucky, and this reconfirms him in his foolishness.
When I was young and
had just turned bullish on gold (circa 1970), I spotted the pull back to
support (the reverse of the pull back to resistance which is now occurring in
the dollar). I picked a small Canadian gold mine (Lake Shore Mines) as
my play. The company was making no money. The price of gold was
so low that revenues were below costs. It ceased operations, and the
mine was allowed to flood. It had virtually no assets. But I knew
that the coming rise in the price of gold would bail all this out. The
company was cheap, and it had the expertise to find new gold when the price
had risen enough to warrant reopening.
The play, of course,
worked out. But it took much longer than I had anticipated. I
thought, here I had been right, but all that impressed me was that I was only
making a small amount of money on a per annum basis. Finally, in 1979, Lake
Shore took off, and I
realized my mistake. The gold buyers in the early part of the decade
were very timid. They listened to the propaganda from the (anti-gold)
media. When they did buy, they could only summon up the courage to buy
the safe, conservative mines. It was only when confidence returned that
they were ready to try the most speculative mines.
I realized that there
was a phenomenon called market mood. Sometimes traders were confident
and bought the risky stocks. Sometime they were timid and bought the
safe ones. That is, there was a principle of market mood. Whether
the market mood was confident or timid would determine which group performed
best. This market mood, of course, had nothing to do with
fundamentals. It was a principle of psychology (and fundamentals have
nothing to do with psychology).
Had I understood this
principle early on, it would have brought definite benefits. Here in
the second upswing of the commodity pendulum I am first making my play in the
safe gold stocks and will only shift over to the risky ones when the
technicals tell me to. You have seen many articles on this
web site pushing the smaller, more speculative gold mines and predicting that
their day will come. This is true. At some future point, their
day will come. And I will know this day by the technical action in the
charts. The speculative mines are already a solid fundamental buy and
have been so for a long time. But they have been getting killed since
2007. (Check the CDNX.). This is why I am making money in the
gold stocks, and many other gold analysts are not.
NEW POLICY ON PAYPAL
I had a bizarre
incident with regard to Paypal (the internet payment company) this past week,
and I think that it should become a public issue. Suddenly and without
explanation Paypal, with whom we had done business for 1½ years,
suddenly froze our accounts and refused to forward money which you had sent
(via them) to pay for subscriptions. When we pressed for an
explanation, we were met with questions which suggested that we were somehow
engaged in money laundering or some other illegal activity (“suspicious
increase in account activity”). This “suspicious” increase
was probably due to the fact that I was hitting the gold market very well
late last year, and you nice people were increasing your subscriptions.
Of course, that is what every business in the world is trying to do, increase
its revenues.
It seemed to be (my
judgement) that Paypal was acting as front man for some government agency
which I had offended and which was trying to construct a case against me
based on their powers under the Patriot Act. When I proved that I was a
businessman in good standing, their case collapsed, and Paypal rescinded the
freeze.
I understand that
Paypal did not initiate this attack. However, they were only too
willing to play ball with the (unknown) Government agency. It is the
job of a business to provide goods or services to its customers, not to
conduct sting operations against them or to entrap them. If anyone
wants to investigate me, then they have to show the legal authority to do so
and not hide behind a front.
Paypal seems to have
an enormously inflated ego. They provide a very minor service in
speeding up your transmission of money to us. On the other hand, it is
not in my interest to do business with companies who do not show good will
toward me, who act as shills for the Government and who are trying to entrap
me into the commission of a crime. Paypal seems to have forgotten that
there are good, old-fashioned ways of sending money, such as the U.S. Post
Office. Indeed, I think that Paypal has put a big one over on all the
businesses which use it. These businesses have fallen into the trap of
accepting a lower profit on their Paypal customers than their other
customers. They have set up an incentive for people to use Paypal, and
the cost is borne by those who do not. I have been making this mistake
(inadvertently), but that policy is now ended. From now on, all
subscribers who do not require us to pay the Paypal fee will receive a $5.00
discount from the normal $300 subscription price. I will continue my
association with Paypal for the sake of those subscribers who are too distant
to receive prompt mail service, but they are definitely on trial with me, and
if they have committed any illegalities in their harassment of me, I intend
to pursue justice. Be on notice.
As noted, my
newsletter is the One-handed Economist, and its price is $300 per
year. Subscribers who do not force us to pay the Paypal fee will
receive a $5.00 discount (sort of like a cash discount at a gas
station). Send a check for $295 to The One-handed Economist, 614 Nashua
St. #122, Milford, N.H. 03055. Subscriptions are sent via e-mail (with
a conventional mail back up if requested). If you want to continue
doing business via companies which are attacking our freedom, then visit my
web site, www.thegoldspeculator.com and press the Paypal button. This means that you have to pay
$300, but we receive a smaller amount. (Conventional mail back up if
requested. You are forgiven for this if you live a considerable
distance from the White Mountains where we dwell in the frozen land of the
north with the Ice Queen and her minions.)
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