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Alas, poor gold
bug; I knew him Horatio. He had the brains to be perfectly positioned
in the great gold bull market of 1999-2020. Yet he did not make any
money from his wisdom. Take, for example, the sell-off of April 16,
2010. Gold was just about to make another powerful move to the
upside. But the sell-off scared him away, and he missed the move.
What
was it that he did wrong?
Those
who read these articles know that I am a big chart man, and last week’s
action in the markets is a good example of why this is so important.
There is much to be learned from the charts, but the most important is
perspective. When one looks at any object, perspective is very
important. Take, for example, a mountain range. One can see it
from a satellite picture taken from earth orbit. One can see its
majestic beauty from a few miles away (where it dominates the horizon).
Or one can focus on a single daisy on the mountainside on a summer day.
These are three different pictures, and they carry three different emotions.
The
vast majority of your fellow traders (against whom you are competing) are not
chartists. The emotion with which they see the market roughly
corresponds to the emotion of the average trader. He remembers the
market action for the past few months, and what has happened further back
sort of fades into the distance.
First,
as soon as you start to trade the market and have your own money at stake,
your perspective changes radically. You see everything through a
microscope, as it were. Time slows down, and everything becomes much
more vivid. Now, what is the message of the above chart?
The
answer is clear. Gold is moving sideways. Isn’t it
obvious? Well,
not exactly:
This is why I usually emphasize the 10-15 year chart. It gives an
entirely different picture. Gold is going up.
Well,
what is it? Is gold moving sideways, or is it moving up? And this
is not just a matter of semantics. The question is being asked from the
very practical viewpoint of how do I make the most money?
In
theory, it might seem that one can make money at either level. Either
focus on the short term and play the up and down moves, or focus on the big
picture and hang on tight for the big move. But over a century of
trading by some of the country’s best has given a different answer, and
I never tire of saying it. THE BIG MONEY IS MADE IN THE BIG MOVE.
Yes,
you can catch a short term move. You can catch many of them. But
the short term is too hard to predict. Take, for example,
Friday’s decline in gold. It was caused by the U.S.
Government’s lawsuit against Goldman Sachs. Like many other
events which move the markets this was almost impossible to predict for two
reasons.
One
can imagine aggressive fundamental traders who employ a host of flies on the
wall who travel over the world and spy on the key events which will move
markets. One of the flies is in the U.S.
attorney’s office in Washington,
D.C. Another fly is in
the office of the oil minister of Saudi
Arabia. And another fly has infiltrated
into a radical terrorist group which is planning to blow up an oil
pipeline. (And then there are 4,567 more flies at various key points
around the world where market-moving events are likely to happen, all ready
with their cell phones to report in as soon as an important news item comes
their way.)
But
even if your army of flies is ready to go, you face a second problem.
You can be the smartest economist in the world. You can correctly
forecast the economic results of all the news your flies bring to you.
But how do you know how the markets will interpret that news? The most
famous example of misinterpretation of a news item was Nixon’s
imposition of price and wage controls on August 15, 1971. If your fly
on the wall in the Oval Office in August 1971 had reported this to you, then,
being a good economist, you would have said, “Wow, this means that
Nixon is planning to print money. This is bullish for gold.
I’m going to buy.”
But
the stupid traders in the markets said, “Wow, the great leader is
taking decisive action against inflation. This means that prices will
not go up. Therefore, I’m going to sell gold.”
Now
the stupid traders were wrong in the long run. But there were so many
of them that they dominated the markets in the short run, and both gold and
gold stocks went down. And this is another serious problem with
fundamental analysis. You can have flies on the wall all over the
world. You can correctly analyze the economic effects of the events
they report. But you can never be sure that the market will agree with
your analysis. All your good work goes down the tubes because of that
large majority of stupid people (at least stupid compared to you) who move
the market in the opposite direction from what it should be.
A
good example of this is Friday’s attack on Goldman Sachs. If you
can remember back two years ago, when the Wall Street bailout passed
Congress, candidate Obama supported it. This support was crucial
because it allowed the Democratic members of Congress to vote for the bill,
and it was the Democrats who provided the votes needed for passage. So
in a very real sense it was Barack Obama who gave the $750+ billion to Wall
Street (most of which ended up at Goldman Sachs).
In
short, the entire anti-Wall Street aura of Obama’s lawsuit against
Goldman is for show. It is to convince the stupid public that he is
against the rich. Democrats have done this since the New Deal.
Rich Americans are willing to put up with this anti-rich rhetoric as long as
the Government keeps stealing money from the average American and giving it
to them, and they prove this by donating money to New Deal politicians.
Nothing has changed for 77 years. The only difference is that the
original New Dealers were more subtle about it.
So
for traders to fear that Obama is suddenly turning against the rich is
naiveté of an extreme kind. It is the exact same type of
misinterpretation of a news event as the price controls of 1971. In the
One-handed Economist of April 16, 2010, I present my argument that
Friday’s decline in gold presents a buy opportunity.
If
you compare the two gold charts in this article, you will come to understand
the importance of the observation that the big money is made in the big
move. It has occurred to many people to focus on the short term and buy
the dips and sell the rallies. This can work for a while. But
sooner or later the market puts on a good move, and then you are left
behind. It is well known, for example, that in the options’
markets the option buyers usually lose, and the option writers usually
win. This is because the buyers are too focused on the short
term. They get overexcited by the prospect of big profits in a short
period of time. So they rush in and overpay for their options.
This is all the writer needs. He plays it conservatively, gets the odds
on his side and plays the percentages. He is a winner. The short
term buyer is a loser.
The
proven path to success in the markets is to latch on to a long term move
whose cause is not understood by most traders. This fundamental cause
will dominate the markets, and it is most visible on the long term
chart. It took almost 5 years for gold to form its saucer bottom, and
one was best advised to be otherwise occupied during that time. But once
the saucer broke to the upside (Dec. 2002) that was the signal that gold was
going up. And it has been up ever since.
We
are a long way from the end of this gold bull market, and the best way to
make some pretty pennies from it is to keep focused on the big move.
Keep in mind that long term chart, and expect reactions or consolidations to
occur for periods of about half a year. Design for yourself a strategy
within your means which will being in the profits as the long term move
unfolds.
Getting
out near the end of the move is another problem but is not too
difficult. It is some distance in the future, and we can leave this
problem to another day. Right now the danger is not that we will
overstay the top. It is that we will be scaredy cats and sell too
soon. In this way, the market runs away from us, and we are not in it.
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.
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