The
recent price action in gold provides many examples of good speculation. Indeed, good speculation is not
complicated. The main problem
with modern speculative analysis is that it is so full of false
theories. It reminds me of Ronald
Reagan’s statement, “Well the trouble with our liberal friends is
not that they are ignorant. It is
that they know so much that isn’t so.” (Of course, in my book that could be a
pretty good definition of stupid.)
The
problem with modern speculation is that there are too many mathematicians in
the field who are trying to show off how much mathematics they know. Somebody has to say to them,
“Stop, simplify. When you
learn a new principle, ask yourself, does this work in practice?” Because, if it doesn’t work,
then your brokerage account is not going to grow bigger.
One
of the rules I have found most useful in trading the different markets is to
make a special study of each market.
Each has its own peculiarities, and one has to learn which principles
apply best to which particular market.
One market may be seasonal with certain patterns appearing at certain
times of the year. Another market
may be technical with chart patterns and trend lines giving the best
predictions. A third market may
be weather-dependent. To have a
big crop, the weather must be just right at key times of the year. As this market approaches one of these
key times, everyone is focused on the weather, and the prevailing weather
theories (be they right or wrong) become very important in forecasting price
movements. Therefore, it is
important that you devote the time and energy to get to know a market before
trading it. And since nothing
quite focuses your mind like having your own money at stake, it is a good
idea to trade a market, at least with a small amount of money, while learning
it.
I
like the gold and other precious metals markets because they are general
commodity markets. Indeed, the
basic argument for gold is that the value of the dollar (or any other paper
currency) is going down (in terms of real goods). This decline in the value of the
dollar affects each commodity to some degree, and the result is that gold
acts like a general CRB index.
In
addition, gold is widely traded, and therefore it follows the basic technical
theories, which depend on certain widely believed (but wrong)
principles. Your fellow traders
following these wrong principles are going to lose money, and what better
place for this money than in the pocket of a nice fellow like you?
In
our chart above, the action begins with a late summer bottom followed by a
strong up move through the autumn.
(Here the absolute bottom came in July; often it is in August; at any
rate a buy in late August almost always gets much better immediate
action. It is a lot more
satisfying to see your account go promptly into the black than to have to
wait for a while flirting with small losses. At the worst, there have been a few
cases where the decline persisted into October (2006, 2008) , but even then there was a strong rally
through the rest of the autumn and into the winter.
The
chart continues up to $1,225 in early December, and this happens to be the
exact price objective defined by a symmetrical triangle which formed over the
middle part of 2009 (not fully shown).
Since markets will usually react after reaching such a price
objective, this was an important clue to my prediction of an intermediate
decline in gold on Dec. 2, 2009.
The
decline of Dec.-Jan. rounded over into two overlapping head and shoulders
bottoms. The first of these has
the left shoulder in late December, the head in early February and the right
shoulder on March 25. Its
neckline is downward sloping, and it broke its neckline on April 7. Then it made its final return to that
neckline on April 19. When a
chart obeys several technical signals in this way, we can be confident that
the signal is valid.
The
second of the two overlapping head and shoulders bottoms has the same left
shoulder and head, but its right shoulder came on April 19 (the same move
which constituted the pull back to neckline for the first bottom). It then turned and broke its (slightly
upward slanting) neckline on April 30 and for the last 2 weeks has been
powering higher. This second
bottom still lacks a pull back to neckline (which would probably occur around
$1,180), and we have to be wary for that. But it has propelled gold to an
all-time high, and the price objective from the second head and shoulders
bottom is around $1,290-95. The
price objective of the first head and shoulders bottom, by the way, was
$1,230, and this was hit this past week.
Pull
backs are a vexing problem in technical analysis. One very rarely sees a technical
breakout which is not followed by a pull back. However, the problem is that there is
no clue as to when that pull back will begin. The symmetrical triangle in gold of
2006-07 kept going up and up without a pull back. Finally when I had given up my
expectation, the pullback came (March to October 2008), and it was certainly
a whopper. Perhaps some future
technical genius will discover how to predict when these pull backs will
start. Right now all we know is
when they end.
The
important technical accomplishment of this week is the break of the Dec. 3,
2009 high at $1,225. On a long
term chart, this reaffirms the long term gold bull market. A bull market is defined by a pattern
of higher highs and higher lows, and the new high is now in place. Indeed, Friday’s action
constituted a short term pull back nicely to the Dec. 3 high. (Such short term pull backs are very
frequent and do not substitute for the more normal pull back.)
By
the way, the best discussion of such chart patterns and how to use them to
predict price movements that I have found is Technical Analysis of Stock Trends by Robert Edwards and John
McGee. It is a book which has
stood the test of time and is often referred to as the Bible of technical
analysis.
This
week’s chart is very useful from another point of view. It is short enough so that we can all
remember what we were thinking and what we were feeling as we lived through
those price movements. Do you
remember the crisis over the euro in March and April? Do you remember the Greek riots and
the killing of 3 innocent bystanders?
Remember
the advice of Baron Phillipe Rothschild, who said, “Buy when
there’s blood in the streets.” The Greek “crisis” was an
attempt by the European paper aristocracy (with support from the American
paper aristocracy) to destroy the euro as a quasi-hard currency. Now the precedent has been set that,
whenever any obnoxious gang of thugs and criminals want to bully Europe into
giving in to their demands, all they have to do is to destroy property and
kill people. The media will
declare a crisis, and the countries of Europe will reward them for their
behavior. But, of course, since
there is no country in Europe (or in the world) which has extra money lying
around for such occasions, the way that the Europeans came up with the money
was (is) to print it out of nothing.
At this writing, Jean Claude Trichet is in the bond markets buying
securities with newly printed paper.
Of
course, the printing of paper money is extremely bullish for gold. However, you remember those days, and
you remember how gold swooned every time the euro fell. The reason is that the propagandists
for the paper aristocracy were trying to create a sense of crisis (meaning
bearish crisis) in order to justify the printing of more euros. You remember how the word
“crisis” was in the news almost every day. Your fellow traders fell for this
(deliberate) lie because they read the news media. They sold gold on March 25 and April
19. Yet the chart tells us the
truth. The chart was not scaring
us or trying to play on our emotions (as the paper aristocracy was).
Since
the paper aristocracy does not produce any real wealth, they have to steal
what they get, and their method is counterfeiting (i.e., the printing of
paper money). For them to get
rich, the average person must get poor, and their propaganda is directed at
the average person to give him a wrong view of reality. I can’t save most people, but I
can save you – if you will make a commitment to see reality as it is.
Simply close your eyes and say to yourself (sincerely), “I
promise myself to make the best effort I can to see reality as it is: not as
I want it to be, not as others tell me, but as it is.” That will be your first step toward
becoming a successful speculator, and many times that will save you when
nothing else can.
To
help you see reality as it is, I publish a fortnightly (every two weeks)
newsletter, the One-handed Economist
(cost $300 per year). Starting
just before the turn of the millennium I started a model conservative
portfolio (at a theoretical $100,000).
This week the Model Conservative Portfolio finished just shy of
$190,000. The average equity
mutual fund was unchanged over the same period. In the not-too-distant future, I hope
to announce the doubling of the portfolio. I keep telling these equity fund
managers that they should get out of stocks and into gold, but it is talking
to a wall. If your baseball team
is a loser, then it doesn’t take much brains to know that you need a
new manager.
If
you need a new manager for your money, then I suggest you subscribe to the One-handed Economist. (We don’t actually manage
money. We simply give our best
recommendations on what to do and leave the final decision to you.) You may visit our website, www.thegoldspeculator.com and pay via the Pay Pal button ($300/year), or you may send a check
for $290 ($10 cash discount) to: The One-handed Economist, 614 Nashua St. #122, Milford,
N.H. 03055.
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
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