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Playing the
markets is not an easy occupation. One normally thinks that it involves
buying at the bottom and selling at the top. But in fact, one must make
a new decision every trading day. We had a good illustration of this on
Friday, June 4 when gold plunged sharply in the morning, and at the same time
the dollar broke out of a small triangle to the upside. Since the
dollar often moves opposite to gold, this was a bearish signal for
gold. A year’s trading, then requires 250 decisions. A
decade’s trading requires 2,500 decisions. Fortunately, to make
money we do not need to get all of them right. A good majority
will suffice.
Above
is a daily basis chart of the U.S. dollar (candlestick) showing
Friday’s breakout to the upside confirmed by a high volume day.
With gold plunging Friday morning and the dollar breaking out upside, it was
a scary moment for gold bugs. Fortunately, gold rallied strongly in the
afternoon. It made up all the morning’s losses and put on a solid
gain. Indeed, GLD (the gold trading instrument which has the latest
close) completed a bullish engulfing pattern, a candlestick signal predicting
higher prices.
It
seems that the markets are saying that the old scenario of gold moving
opposite to the dollar (and with the euro), which dominated much of the last
decade, has changed. Now the scenario is that all paper money is
collapsing against gold. And for the past 4 months, the dollar’s
rise against the euro (and other currencies) has been accompanied by a nice
gain in gold.
This
illustrates the importance of perspective in trading the markets. All
of a sudden, as soon as your own money is at risk, everything looks
different. When you were paper trading, you were calm and
rational. But now your perspective has collapsed. “Honey,
could I have the paper? I need to see what my stock did
today.” An hour now feels like a week, and waiting for the end of
the day seems like eternity. With your perspective out of whack, your
judgement follows, and soon your paper trading profits turn to real
losses. (This, by the way, is why I do not recommend paper
trading. Instead I recommend trading with modest amounts of
money. That will give you the sense of what speculation is really like,
and you will learn to make sound judgements in difficult circumstances.)
And
yet, the long term trend is so much easier to play than the short. Look
at the trend in this gold bull market. Surely this trend has been our
friend. All commodity markets, by the way, are not like this.
Each has its own peculiarities, which must be learned by experience.
But gold is a good chart commodity. It is produced all over the world,
and it is purchased all over the world. Many people, each day, are
buying it and selling it. That, of course, is what technical patterns
are intended to comprehend, how the average person thinks and what he will do.
The
average person, as I have noted, commits the fallacy of the fair price.
He believes the teaching of Thomas Aquinas that there is a fair price for
every good and that a good ought to sell for its fair price. He does
not understand the teaching of Adam Smith that any price agreed upon between
buyer and seller is fair, and therefore the crucial determinant of price is
supply and demand.
Let
us say that our average fellow makes the mistake of selling gold on Feb. 5,
at $1,050. “Oh, did that hurt.” He wishes he had not
made that move. Well, the answer seems simple enough. If you
regret selling, then go in and buy it back. “Oh, no, I
couldn’t do that.”
Why,
having regretted his sale, can he not go back in and buy? This puts him
long of gold again and corrects his mistake. But he cannot buy here at
$1,220 because the fair price for gold is $1,050, and he would be overpaying
by $170 (he thinks). In short, because Thomas Aquinas did not tell him
how to calculate the fair price, he confuses the fair price with the price
that is in his mind. It could be the price he is used to because the
good has been trading there for a long time. It could be a high or low
point on a chart that stands out and comes to people’s attention.
It could be a price with a great deal of volume. And, very frequently,
it is the price at which he sold (or bought).
Therefore,
if the price of gold did get back down to $1,050, our average fellow would
rush to buy it because it was now back down to its fair price. And
since $1,050 stands out on the charts, many other people would rush to buy at
the same time. This buying is called support, and $1,050 is a support
level. The corresponding level at which many people will come in to
sell is called resistance.
Once
we understand the support and resistance levels, by inference we can figure
out the larger trend. In the chart above, gold continues to go to new
highs, breaking resistance to do so. Every time resistance is broken
the bullish trend is reconfirmed. Look at how many times this has
happened over the past 10 years.
The
old timers noted this phenomenon many years ago. Most market trends are
caused by large-scale forces too big for most traders to comprehend.
They wind up assuming that current prices are near the fair price, and they
are reluctant to pay more. This reluctance slows down the bull trend,
but the fundamental, large scale force keeps tilting the balance to the
upside. In effect, the idea of a fair price keeps the market
undervalued for a long, long time. The old timers expressed this by
saying, “the trend is your friend,” and this is as true today as
it was in the early 20th century.
Eventually
every trend does reverse. But it continues much more often than it
reverses. Gold has continued to new highs 8 times since 2001. It
has not reversed to a relative low once. In case after case, in good
after good we see these giant bull (or sometimes bear) markets that continue
for year after year. As we look back from the vantage point of the
future and think back to what we were saying at the beginning of the trend,
we are amazed. “I was so certain that gold could never get above
$70 in 1974.” “I laughed at Robert Prechter for predicting
DJI 3500 in 1982.” “I was absolutely certain that T-bill
rates could never get to zero.” But in all of these cases, the
trend progressed far beyond almost anyone’s ability to predict.
All you could say was, “The trend is my friend.” And this
kept you long as the market went up and up.
It
is undoubtedly the same with the current bull market in gold. This
trend will probably go on much longer than anyone now thinks. Indeed,
the best prediction of the grand cycle bull move in gold of the 1970s was
made by Jim Dines. When asked, early in the decade, how high gold would
go, Dines replied that he did not know how high gold would go or how far stocks
would fall, but the two numbers would cross. At the time he made that
statement, gold was only a little above $35/oz., and the DJI was close to
1,000. It seemed a fantastic prediction. But on Jan. 21, 1980,
gold hit an interday high (on the Comex) of $875/oz., and the DJI closed at
872. That $875, by the way, represented a 25-fold multiple for gold in
nominal terms and a 12½ multiple in real terms. Between 1966 and
1982, the DJI fell by about 75% in real terms.
It
is, of course, tempting to make the same prediction for this grand cycle
trend – that gold and the DJI will cross. I am too much of a
scaredy cat to make that prediction here, and I think that I will follow the
same policy I followed through the 1970s. Turn bullish as the trend broke
to the upside and then follow the trend until it had a clear reversal (which
turned out to be the giant one-day reversal of Jan. 21, 1980). At that
time, the trend was my friend. Today the trend is still my
friend. And the trend can be your friend also.
As
the trend in gold was nearing its end, circa 1978-79, the speculative end of
the precious metals group (silver, the exploration stocks) came to life and
made tremendous gains. I look for that to happen as the present bull
trend in gold nears its end. That will be a warning sign. Before
it happens, we are safe on the bull side. After it begins, we still
have a little time.
Now
there are a few people who espouse fundamentals and do not look at the
trend. These people are called brokers. They make their money on
commissions, not profits. For this they need a lot of customers, and so
they follow the policy of telling the average person what he wants to hear
and what is useful to them (the paper money theories of Foster and Catchings
and Keynes and the fair price theory of Thomas Aquinas). Brokers are
friendly, but I do not advise listening to them if you want to make money
because they are not even trying to discover economic truth.
Furthermore the fundamentals being taught in academia and published in
newspapers and magazines are a collection of trash. (Keynes was a
deliberate fraud and did not believe Keynesian economics.) To make
sense of the markets with this false information is almost impossible.
I
write an economic letter called the One-handed Economist, published
fortnightly, price $300 per year. You may subscribe by going to www.thegoldspeculator.com and
pressing the Pay Pal button, or you may send a check for $290 ($10 cash
discount) to: The One-handed Economist, 614
Nashua St. #122, Milford, N.H.
03055.
Note: The One-handed
Economist is written every two weeks (dated Friday) and posted on our web
site (www.thegoldspeculator.com) on
Saturday/Sunday (password protected). Special bulletins are written
when the market says something I think is important, and one was written June
4 (analyzing last week’s behavior and giving guidelines for
gold). Sorry people, but I do not have time to answer individual
questions about the markets, but your questions are useful to me, and I may
discuss an issue in the newsletter if enough people write in about 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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