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A discourse on the price of gold.
The price is ready to explode.
The signal came 4-30-10.
To tell you news, I take my pen.
Here
we see the daily basis chart of gold for the past 6 months. This shows a head and shoulders
bottom, one of the most widely known chart patterns and featured in Technical Analysis of Stock Trends by
Edwards and Magee. On Friday,
gold broke cleanly above its neckline (at $1,170) and closed at a relative
high above $1,180. A gap for the
day punctuated the signal.
As
we will see in the long term chart below, gold is within spitting distance of
its Dec. 2, 2009 high. And all
chart obstacles below that barrier have been cleared. Anyway you look at it, gold has been
going up. And yet the conviction
is still strong in the gold community that gold is going down. It is as though the newspapers were
creating a false reality in people’s minds, and no one had the courage
to challenge it.
But
this, of course, is the test of the true speculator.
“If you can keep your head when all about you
Are losing theirs and blaming it on you;”
If we study history, we find case after case where the market’s
valuation of stocks or commodities has been completely at variance with
reality. I have mentioned the
valuation of gold at $35/oz.in 1968-70.
There is also the valuation of the DJI at 780 in 1982. In the opposite case, we have the
valuation of the S&P 500 at 1500 early in 2000 (with the media screaming
that stocks were going to triple in 3-5 years).
And
while we might wonder at such examples of public irrationality, two things
are important to note: 1) They do happen. And 2) they provide incredible profit
opportunities. Indeed, we could
not make profits if markets did not make enormous mistakes in the valuation
of goods, mistakes which had to be corrected in real time.
What
always happens in long bull markets, such as the one now occurring in gold,
is that people completely lose their perspective. As the market takes the first small
steps on its rise, people immediately worry, “It’s so
high.” It’s not
high. It is ridiculously low, but
no one understands this. Take,
for example, gold at $65/oz. in 1972.
We can now see that, at $65, gold was extremely undervalued. Even when it made its big decline of
1980-81 (normal profit taking after an enormous rise), it never got anywhere
near $65. (If you bought at $65
in 1972 and had the bad fortune to sell at the exact 1982 low, then you only
made 4½ times your money (over a period when stocks were declining in
nominal terms). This is why I
continually say, THE BIG MONEY IS MADE IN THE BIG MOVE. In other words, if you play the big
moves, then the profits are so enormous that even terrible mistakes, such as
selling at a short term low, still leave you well into the black.
Intuitively,
it seems quite reasonable to sell after a short term rise. But for the old timers (the chartists
of the early 20th century), it was strictly an empirical
question. Did it work out better
to sell after a small rise or to hold on for a big move? To their surprise, the fellow who sold
quickly (on the argument “you can’t take a loss taking a profit”)
came out worse. The fellow who
played for the big move came out better.
Many times he took more profits than losses, but they were tiny
profits (and big losses). The
really successful traders often took more losses, but their profits were so
big as to more than make up for it.
I
have been fortunate enough to discover exactly why things are so
counter-intuitive and why people are so anxious to sell too soon instead of
holding on for the big move. One
of the great thinkers of the 2nd millennium was a gentleman named
Thomas Aquinas. He was a great
man and very influential, but he lived in an ignorant time, and not much was
known about economics. He argued
that every good had a fair price.
He confused what the price was going to be with what the price ought
to be. Millions of people all
over the world today follow his teachings. When they see a small rise in the good
they are following, they decide that it is above its fair price. This convinces them to sell and take a
quick profit. When they see a
small loss in the good they are following, they decide it is below its fair
price. They certainly are not
going to sell at an unfairly low price, and so they stick with it. Then the small loss turns into a
bigger loss, and then a bigger loss yet.
One gentleman whom I met in my younger days boasted to me that he
never took a loss. That is, he
was sitting with several stocks, each of which had enormous losses, but he never took them. So in his mind they did not
exist. Perhaps he had purchased the
stock at $100 and it was now sitting at $10. But in his mind the fair price was
$100. Why sell at $10 an object
which is worth $100? So he sat with
his losers.
What
happened next? The losers got
worse. This was observed by the
old timers. It is sort of a Newton’s
Law of Inertia for economic goods.
A stock (or commodity) in motion will tend to remain in motion (in its
trend) until acted upon by an external force. (This is more true of stocks than
commodities because commodities do not have earnings and are purely a matter
of supply and demand.) This
gentleman bragged that he never took a loss. But he took losses day after day after
day. He just never admitted
them. But people like this are
all to our advantage. When a
market goes in their direction, the mistake they make is to sell too soon. This moderates the early stages of the
rise and gives you many opportunities
to get in. What is amazing is
the extent to which people will rush in to sell on any minor rise, thus
turning their potentially big profit into a small one.
For
example, to keep things simple let us say that you make one decision (to buy,
hold or sell) each year.
(Actually you make such a decision every day.) Then for the grand cycle gold bull
market of the 1970s the first 10 buy/hold decisions were right and the 11th
(in 1980) was wrong. The
percentage in your favor was 91%.
Now
it is true that every bull market will end. The old timers did not deny that. But you make a lot more money by going
with the trend. The trend is your
friend.
Further,
as we study a bull market, it develops a character. The buying and selling which goes on
every trading day is based on the beliefs of the traders. But these beliefs remain roughly the
same over the course of the bull market.
And so the market continues the same character, and this can be used
to predict just where you are in the trend.
For
example, when a gold bull market starts, most gold bugs are very timid. This shows itself by
conservatism. They buy the blue
chips and shy away from the speculative end of the market. Indeed, at the beginning of this grand
cycle bull move many large gold mines were selling short (under the euphemism
“selling forward”).
They were selling short on their own product. (Through my life in American business
it has been about a million to one shot to find a company bearish on its own
product.) That was a solid
indication that the bull market had begun.
At
the present time, the big moves in the precious metals group have been in the
conservative instruments. For
example, the XAU and HUI have been outperforming the CDNX (up through Dec.
’09), and gold has been outperforming silver. Toward the end of this grand cycle
bull market we should see the small exploration companies outperforming the
old blue chips, and we should see silver outperforming gold (as happened in
1978-early 1980). But as yet,
there is little sign of this.
So
play the odds and make the trend your friend. It is by no means too late to get into
this grand cycle bull market in gold.
He who hesitates will have smaller profits.
The
One-handed Economist is my economic
newsletter, published fortnightly at the close every other Friday (and
e-mailed Saturday/Sunday. The
cost is $300 per year. You may
subscribe by visiting my website, www.thegoldspeculator.com and pressing the Pay Pal button.
Or you may subscribe via the U.S. mail by sending a check for $290
($10 cash discount) to: The One-handed Economist, 614 Nashua St. #122, Milford,
N.H. 03055.
The coming short term market period should be very
exciting. Gold should now mount
its assault on its Dec. high. If
this can be breached, then the pattern of higher highs and higher lows will
be reaffirmed. The neckline at
$1170 should not be significantly penetrated. Once the Dec. high is reached, this
will act as a minor resistance level which will hold up the advance (probably
for several weeks but at most until late August). Then, as autumn approaches, the bull
will resume and put on another leg up.
Two new recommendations in the 4-30-10 issue. Thank you for your interest.
# # #
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)
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