Things seem to be moving much more quickly recently. I had originally titled this post "Bad News Everywhere" on March 22, but in just a week, things don't look so bad anymore.
The big news since my last update is that the SPX successfully tested its January high of 1150 and broke the resistance level to set new highs. Unfortunately for stocks, things don't look so good. But in contrast to last week, things have gotten better for the stock market. Last week, there seemed to be a good possibility that the SPX would face a significant reversal; now, while it's likely the SPX will fall back to 1150, it is likely to find support there. In other words, this bull market still(!) has legs. The market had a key reversal day on Thursday, which lends to the short-term bearishness. More disturbingly, sentiment is near record levels of bullishness, which bodes ill for the short-to-intermediate term. Thus, while the intermediate trend is currently bullish (after having broken above resistance at 1150), there are plenty of caution flags that reinforce the belief that this stock market is not for buy-and-hold investors.
And yet plenty of people will be deceived to think that good times are back. The economy appears to be recovering, and people are eager to spend money -- even if the fundamentals are as bad as, if not worse than, 2008, and even if consumers are simply giving themselves more rope to be hanged with. So it may surprise some people that I predict the S&P will rise by another 60 points, to 1233 to be exact, which is based both on an inverse head and shoulders pattern that I mentioned sometime ago from a source I follow, as well as a 61.8% Fibonacci retracement of the S&P's 2007 high. I think this is the absolute ("absolute" being a relative term in this game) highest it will go. If the SPX manages to blow past this number, then the bull market will turn out to be far more powerful than any of us thought -- and it's already shown itself to be a force to be reckoned with. But I think 1233 will prove itself to be a worthy contender at stopping the advance. When might the stock market reach this level? My guess would be within the next two months or so, but when it reaches it is sort of irrelevant; when it gets there, we'll consider our options. In the meantime, we can continue to expect the same slow, relentless drive upwards, punctuated by a minor correction. Close trailing stops on SPY should work pretty well; just remember that the long-term trend is still down.
The dollar actually reached my target of 82, but just barely. With the target reached, the dollar has since declined. It now seems more likely that the dollar will continue to decline from here, at least for the short term. In this case, the intermediate trend is up, but we should expect to see some consolidation from the dollar. In particular, we should pay attention to two numbers. The first is 80, which is approximately where the 50-day moving average is. The second and more important number is 78.25 or thereabouts, as that is both the 200-day moving average and a 50% retracement. I still believe that the dollar will continue to surprise people, but at the moment it seems a decline is in order.
As I mentioned earlier, the situation in gold has cleared up quite a bit recently, and the declining dollar is another piece of good news for gold. The PM sector was formerly quite correlated with the stock market and not as much with the dollar, but lately gold has returned to its usual pattern of being highly negatively correlated with the USD. Since the dollar is likely to fall, this is very good news for gold. RSI and Stochastics are in favorable alignment, and the 50-day moving average is providing support. In addition, the big move last Friday likely marked the bottom. Strong price action in silver also suggests the end of the consolidation is near or has already occurred. Silver and gold stocks have both shown some vigor, and based on their tendency to lead gold, this portends well for gold prices in the near future. Gold has been very quiet lately, but I would not be surprised to see a quick move back to the $1200 level.
Finally, I'd like to comment on something I don't usually mention, US Treasuries. The 10-year Treasury has begun breaking down, as has the 30-year Treasury, which is bad news on several fronts. Falling prices mean rising interest rates, since bond prices and interest rates move opposite of each other. What do rising rates mean? First, rising interest rates will quickly kill any economic recovery. If consumers can't afford 3-4% mortgages and credit cards, there's no way they'll be able to afford a 5% or 6% or even higher interest rate. Second, rising rates are disastrous for the US government. The deficit is already at gigantic proportions, and this is at record-low interest rates. If rates continue to rise, the government will find it impossible to service all that debt. Interest payments will quickly devour the federal budget. Finally, rising rates portend the specter of inflation has returned. Is the deflation/inflation debate about to be resolved? Stay tuned.
Showing posts with label gold. Show all posts
Showing posts with label gold. Show all posts
Wednesday, March 31, 2010
Thursday, March 11, 2010
Signs of a Golden Spring
So much has changed in only two weeks. I first started writing this update on February 26, when things were looking good for the precious metals market, hence the optimistic title. I put off writing some more until March 6, when I wrote, "Since then, things have deteriorated quite a bit." And indeed, since then, things have deteriorated quite a bit, which was proven this week with gold falling by thirty dollars since I wrote that line. But I'm getting ahead of myself here. Let's start at the beginning.
Since my last update, things have more or less gone as I predicted. Stocks continued falling and actually did reach my target of 1037 before reversing in a bullish hammer candlestick pattern on February 5. However, the correction in the stock market was strong enough that according to almost all of the sources I follow, the intermediate trend has turned bearish. While that doesn't mean the stock market can't keep rising (and in fact, it's been rising for several weeks now), that does mean it has to prove itself before we can say the stock market will post new highs. That being said, the S&P is now inches away from its January 19 high of 1150.45 and is ready to test that high.
Tomorrow is going to be a big day. As I said above, the intermediate trend is bearish. In order to turn that trend bullish, the SPX must break above that high and stay above it for three consecutive days. If it does that, then we can say with a fair amount of confidence that the bull market is alive and well and will continue to rise. (Even though from a fundamental standpoint the stock market is outrageously overextended....) Although volume has been declining -- a bearish sign -- the past few days, volume has been increasing with the new highs, which is a bullish sign. In addition, the Dow is about a hundred points from its January high, meaning it needs to catch up, although it's possible we could have a scenario where the Dow catches up and the S&P posts a new high but fails to hold it for the requisite three consecutive days.
If the SPX does not break the January high (i.e., tests and fails), then it is likely that today's high marks a double top, which is very bearish. The most important support level to look at is around 1115, as that is both the 61% Fibonacci retracement level and the 50-day moving average. Using retracements, the next support would be around 1105, then around 1090. The 1090 level also marks an old resistance/support line. I expect the 1115 level to be relatively strong -- if it breaks easily, then stock bulls better be careful. In any case, no matter how you look at it, it's best to be cautious and see what happens before taking positions on either side of the market.
The PMs also did what I expected, though they did fall a bit more than I had thought. However, in keeping with the title of this post, it's not all bad, as things are looking more positive for gold than they have compared to December or January. Unfortunately, as I said at the beginning of my post, the situation has deteriorated quite a bit. The biggest sticking point is that sentiment is excessively frothy considering the rather lackluster price action we've seen in gold. While it's most likely February 5 did mark the beginning of the next bull leg (and hence likely marked the bottom), gold is going to have to take a breather. The nearest support is $1110, which is where gold is at right now, then $1102, then $1093, then $1080. My feeling is that gold will fall below $1100, as sentiment has not improved even though gold has fallen by over thirty dollars. Fortunately, RSI is neutral, and Stochastics are falling rapidly, suggesting the bottom is not too far way, perhaps a week or two from now.
The situation in silver is similar to gold, but the most interesting thing is that silver has shown relative strength. The PM sector has been highly correlated with the stock market lately, more so than with the USD, which is both good and bad, as I will explain in further detail when I talk about the dollar. However, silver has been particularly tightly correlated with stocks. Stocks have been strong, and so silver has been strong. If the SPX breaks out to new highs, then we should continue to see continued strength in silver. If it bounces off resistance, then we could see a rapid decline in silver to match gold's decline. One worrying aspect is that while RSI is neutral, Stochastics are overbought. Thus, I think there's currently more downside risk than upside risk with silver. With that said, my feeling, though, is that we will continue to see silver leading gold. (As an aside, typically silver underperforms gold at the beginning of a bull wave, then outperforms towards the end. Is silver's current outperformance a sign that we can see a strong bull leg in the future?)
Gold stocks are generally mirroring silver's price action, showing relative strength compared to gold. Similar to silver, Stochastics for HUI are also overbought, and thus the near-term downside risk is greater than upside risk. However, as with silver, I think the strength in HUI/GDX is a good sign for the intermediate and longer terms; during the bull run we saw last fall, gold stocks were weaker than gold, which is the opposite of what we normally expect, and an overall negative sign. If they continue to lead gold, then we should see a powerful bull run in the coming months.
Finally, we come to the USD. The dollar reached the upper bound of my target and since then has been consolidating in a flag-like pattern. Both RSI and Stochastics are neutral. I have a feeling that the dollar will continue consolidating for at least a few more days, but my next target is 82. I'm bearish on the dollar over the long term, of course, but I think for the intermediate term things aren't looking so bad. The intermediate trend is bullish, and a bullish golden cross has appeared on the chart. Interestingly, it's possible that a rising dollar will not have much of an effect on gold. One major issue lately is that it's been unclear whether gold would follow stocks or the dollar. We've gotten some clarity lately, as gold and stocks have been rising in concert in spite of the rising dollar. Of course, correlations can change, as we've seen these past few days, as stocks have kept rising while gold has fallen. Nevertheless, barring a euro currency crisis with Greece in the next few weeks (note that I called out Greece as a "looming problem" before the crisis broke!), I don't expect a strong impact from the dollar on gold.
Since this is a longer post than usual, I'll summarize: stocks are at a critical juncture, gold needs to fall some more but is otherwise building a nice foundation for the next bull run, and the dollar might continue to surprise a few people. The overall theme is to be cautious and let things play themselves out before committing to being long or short the market. After all, in this game, you can always catch the next ride.
Since my last update, things have more or less gone as I predicted. Stocks continued falling and actually did reach my target of 1037 before reversing in a bullish hammer candlestick pattern on February 5. However, the correction in the stock market was strong enough that according to almost all of the sources I follow, the intermediate trend has turned bearish. While that doesn't mean the stock market can't keep rising (and in fact, it's been rising for several weeks now), that does mean it has to prove itself before we can say the stock market will post new highs. That being said, the S&P is now inches away from its January 19 high of 1150.45 and is ready to test that high.
Tomorrow is going to be a big day. As I said above, the intermediate trend is bearish. In order to turn that trend bullish, the SPX must break above that high and stay above it for three consecutive days. If it does that, then we can say with a fair amount of confidence that the bull market is alive and well and will continue to rise. (Even though from a fundamental standpoint the stock market is outrageously overextended....) Although volume has been declining -- a bearish sign -- the past few days, volume has been increasing with the new highs, which is a bullish sign. In addition, the Dow is about a hundred points from its January high, meaning it needs to catch up, although it's possible we could have a scenario where the Dow catches up and the S&P posts a new high but fails to hold it for the requisite three consecutive days.
If the SPX does not break the January high (i.e., tests and fails), then it is likely that today's high marks a double top, which is very bearish. The most important support level to look at is around 1115, as that is both the 61% Fibonacci retracement level and the 50-day moving average. Using retracements, the next support would be around 1105, then around 1090. The 1090 level also marks an old resistance/support line. I expect the 1115 level to be relatively strong -- if it breaks easily, then stock bulls better be careful. In any case, no matter how you look at it, it's best to be cautious and see what happens before taking positions on either side of the market.
The PMs also did what I expected, though they did fall a bit more than I had thought. However, in keeping with the title of this post, it's not all bad, as things are looking more positive for gold than they have compared to December or January. Unfortunately, as I said at the beginning of my post, the situation has deteriorated quite a bit. The biggest sticking point is that sentiment is excessively frothy considering the rather lackluster price action we've seen in gold. While it's most likely February 5 did mark the beginning of the next bull leg (and hence likely marked the bottom), gold is going to have to take a breather. The nearest support is $1110, which is where gold is at right now, then $1102, then $1093, then $1080. My feeling is that gold will fall below $1100, as sentiment has not improved even though gold has fallen by over thirty dollars. Fortunately, RSI is neutral, and Stochastics are falling rapidly, suggesting the bottom is not too far way, perhaps a week or two from now.
The situation in silver is similar to gold, but the most interesting thing is that silver has shown relative strength. The PM sector has been highly correlated with the stock market lately, more so than with the USD, which is both good and bad, as I will explain in further detail when I talk about the dollar. However, silver has been particularly tightly correlated with stocks. Stocks have been strong, and so silver has been strong. If the SPX breaks out to new highs, then we should continue to see continued strength in silver. If it bounces off resistance, then we could see a rapid decline in silver to match gold's decline. One worrying aspect is that while RSI is neutral, Stochastics are overbought. Thus, I think there's currently more downside risk than upside risk with silver. With that said, my feeling, though, is that we will continue to see silver leading gold. (As an aside, typically silver underperforms gold at the beginning of a bull wave, then outperforms towards the end. Is silver's current outperformance a sign that we can see a strong bull leg in the future?)
Gold stocks are generally mirroring silver's price action, showing relative strength compared to gold. Similar to silver, Stochastics for HUI are also overbought, and thus the near-term downside risk is greater than upside risk. However, as with silver, I think the strength in HUI/GDX is a good sign for the intermediate and longer terms; during the bull run we saw last fall, gold stocks were weaker than gold, which is the opposite of what we normally expect, and an overall negative sign. If they continue to lead gold, then we should see a powerful bull run in the coming months.
Finally, we come to the USD. The dollar reached the upper bound of my target and since then has been consolidating in a flag-like pattern. Both RSI and Stochastics are neutral. I have a feeling that the dollar will continue consolidating for at least a few more days, but my next target is 82. I'm bearish on the dollar over the long term, of course, but I think for the intermediate term things aren't looking so bad. The intermediate trend is bullish, and a bullish golden cross has appeared on the chart. Interestingly, it's possible that a rising dollar will not have much of an effect on gold. One major issue lately is that it's been unclear whether gold would follow stocks or the dollar. We've gotten some clarity lately, as gold and stocks have been rising in concert in spite of the rising dollar. Of course, correlations can change, as we've seen these past few days, as stocks have kept rising while gold has fallen. Nevertheless, barring a euro currency crisis with Greece in the next few weeks (note that I called out Greece as a "looming problem" before the crisis broke!), I don't expect a strong impact from the dollar on gold.
Since this is a longer post than usual, I'll summarize: stocks are at a critical juncture, gold needs to fall some more but is otherwise building a nice foundation for the next bull run, and the dollar might continue to surprise a few people. The overall theme is to be cautious and let things play themselves out before committing to being long or short the market. After all, in this game, you can always catch the next ride.
Saturday, January 23, 2010
Memories of the Panic of '08
For investors grown complacent by the steady grind upwards in stocks, the dramatic fall these past few days has certainly been a wake-up call. In the past three days, the Dow has fallen over 500 points. Gold is down $40, and the US dollar is surging. The impact in the news that these declines have been generating is somewhat reminiscent of September and October 2008. Is this going to be the beginning of the big fall? While I've been saying for a long time now that the stock market will eventually test and fail the March low of 666 in the S&P, until we see a decisive break downwards, I'm not holding my breath.
I've been bearish on the stock market for a long time now, even though the stock market hasn't been willing to oblige. At the very least, however, it did need a breather; the last correction was back in October. The SPX is down a little over 5% from its high, but a healthy correction often sees a 10% decline. In that case, we could see the market decline to around 1035. More realistically, I would look at 1070 first, which would match better with the previous decline, which was 6.5%, and forms a support level based on a trendline from the two previous lows.
Suppose the market bounces off 1070 and begins yet another rise. What could we expect then? One source claims a long-term reverse head and shoulders target of around 1200-1230, around 15% higher from 1070. I'm slightly skeptical of the justification used for this target (mostly because the volume doesn't really confirm), but we should keep an open mind. And if support at 1070 fails? Frankly, this market has been so (suspiciously) powerful that I won't become bearish until something dramatic happens. If the market breaks through the 200-day moving average, currently at 1007, then I'll reconsider, but until then, I'm begrudgingly bullish on the stock market, at least for the medium term.
Though commentators have been concentrating on everything from disappointing earnings to uncertainty surrounding Ben Bernanke's reappointment as the cause of the recent decline, perhaps the driving factor in my mind is the US dollar, which recently broke out of a flag formation and is surging upwards towards a target of 80-81. This has triggered a sell-off in commodities such as oil and gold, and consequently led to the stock market decline. Considering that we are only about halfway to the target (the dollar is currently at 78.23), I expect more pain ahead.
The recent dollar rise has certainly been the major factor in gold's decline, but gold has been consolidating since its peak of $1225 in early December. Gold is now down about 10% and is likely close to the bottom. However, there's still some room for it to fall, as both RSI and Stochastics are not yet into oversold territory, and it may be another week or two before gold finishes its correction. Bear in mind that though gold has entered into a seasonally weak period, winter overall is gold's strongest season. By the end of its run, gold should post an intermediate top much higher than the recent high of $1225.
Like gold, silver has been consolidating since its early December peak, though its movements of course have been more volatile. Currently at $17, I expect silver to fall a bit more from here, perhaps down to $16.50 or $16 before beginning its ascent. By the end of its run, possibly in April or so, it should easily take out its December high of $19 and perhaps even take out its 2008 high of $21.
Finally, gold stocks, as represented by the Market Vectors Gold Miners ETF (GDX), which is very similar to the AMEX Gold Bugs Index or HUI, have so far suffered a 23% correction from the December high. Stochastics have just entered oversold territory, and RSI at 34 is close to oversold as well. One source claims that the PM sector will likely take a breather of at least a few days before declining some more, and personally, it seems like GDX is serving as a leading indicator. Today, while GLD and SLV both fell, GDX actually slightly rose. GDX is currently at $43.79, but it might need to fall to around $42 or so before it can begin the next bull run.
Gold sentiment got a little too frothy in the past few weeks, but the current correction (which is merely the second part of the larger overall correction) should serve to bleed out bullishness. Gold stocks seem to be slightly ahead of the pack, leading the decline, so we should pay attention to GDX to see when the PM sector will renew its ascent. Silver is lagging gold both financially and temporally and has more to fall, but towards the end of the next bull run, it should begin to outperform gold, as it usually does before intermediate tops.
As noted above, the target for the dollar is 80-81, but I'm still bearish on the dollar over the long run. In the intermediate term, though, we should not discount the fact that the US dollar is still the world's reserve currency. If there is another financial crisis (and there are many looming problems to choose from: Greece, Japan, the UK, Spain, to name a few potential currency crises), we could see a repeat of the Panic of 2008, with a flood of money into the "safe haven" of the USD, causing a surge in the dollar index and Treasury prices and a collapse in stocks and commodities. If that should happen, and it will again one day, all bets are off.
I've been bearish on the stock market for a long time now, even though the stock market hasn't been willing to oblige. At the very least, however, it did need a breather; the last correction was back in October. The SPX is down a little over 5% from its high, but a healthy correction often sees a 10% decline. In that case, we could see the market decline to around 1035. More realistically, I would look at 1070 first, which would match better with the previous decline, which was 6.5%, and forms a support level based on a trendline from the two previous lows.
Suppose the market bounces off 1070 and begins yet another rise. What could we expect then? One source claims a long-term reverse head and shoulders target of around 1200-1230, around 15% higher from 1070. I'm slightly skeptical of the justification used for this target (mostly because the volume doesn't really confirm), but we should keep an open mind. And if support at 1070 fails? Frankly, this market has been so (suspiciously) powerful that I won't become bearish until something dramatic happens. If the market breaks through the 200-day moving average, currently at 1007, then I'll reconsider, but until then, I'm begrudgingly bullish on the stock market, at least for the medium term.
Though commentators have been concentrating on everything from disappointing earnings to uncertainty surrounding Ben Bernanke's reappointment as the cause of the recent decline, perhaps the driving factor in my mind is the US dollar, which recently broke out of a flag formation and is surging upwards towards a target of 80-81. This has triggered a sell-off in commodities such as oil and gold, and consequently led to the stock market decline. Considering that we are only about halfway to the target (the dollar is currently at 78.23), I expect more pain ahead.
The recent dollar rise has certainly been the major factor in gold's decline, but gold has been consolidating since its peak of $1225 in early December. Gold is now down about 10% and is likely close to the bottom. However, there's still some room for it to fall, as both RSI and Stochastics are not yet into oversold territory, and it may be another week or two before gold finishes its correction. Bear in mind that though gold has entered into a seasonally weak period, winter overall is gold's strongest season. By the end of its run, gold should post an intermediate top much higher than the recent high of $1225.
Like gold, silver has been consolidating since its early December peak, though its movements of course have been more volatile. Currently at $17, I expect silver to fall a bit more from here, perhaps down to $16.50 or $16 before beginning its ascent. By the end of its run, possibly in April or so, it should easily take out its December high of $19 and perhaps even take out its 2008 high of $21.
Finally, gold stocks, as represented by the Market Vectors Gold Miners ETF (GDX), which is very similar to the AMEX Gold Bugs Index or HUI, have so far suffered a 23% correction from the December high. Stochastics have just entered oversold territory, and RSI at 34 is close to oversold as well. One source claims that the PM sector will likely take a breather of at least a few days before declining some more, and personally, it seems like GDX is serving as a leading indicator. Today, while GLD and SLV both fell, GDX actually slightly rose. GDX is currently at $43.79, but it might need to fall to around $42 or so before it can begin the next bull run.
Gold sentiment got a little too frothy in the past few weeks, but the current correction (which is merely the second part of the larger overall correction) should serve to bleed out bullishness. Gold stocks seem to be slightly ahead of the pack, leading the decline, so we should pay attention to GDX to see when the PM sector will renew its ascent. Silver is lagging gold both financially and temporally and has more to fall, but towards the end of the next bull run, it should begin to outperform gold, as it usually does before intermediate tops.
As noted above, the target for the dollar is 80-81, but I'm still bearish on the dollar over the long run. In the intermediate term, though, we should not discount the fact that the US dollar is still the world's reserve currency. If there is another financial crisis (and there are many looming problems to choose from: Greece, Japan, the UK, Spain, to name a few potential currency crises), we could see a repeat of the Panic of 2008, with a flood of money into the "safe haven" of the USD, causing a surge in the dollar index and Treasury prices and a collapse in stocks and commodities. If that should happen, and it will again one day, all bets are off.
Wednesday, December 23, 2009
Not Even Close to the Top
Not too long ago, The Colbert Report had a segment on gold, poking fun at the relationship between gold buyers (or more accurately, sellers), and conservatives. Apparently Glenn Beck, among others, is sponsored by a gold investment company. I too find it interesting that there seems to be a connection between conservatives and gold, though those of you who know me well know I'm certainly no conservative, not even close to one. (In fact, I would like to ask, where were these people in the Bush days?) But now that gold has been making headlines in the mainstream media, and now has even been featured in a comedy show, does this mean we're close to the top?
Of course not. As I have mentioned before, when we're close to the top, everyone around you will be investing in gold, hoping to strike it rich. People who have no business speculating in gold mining stocks will be admonishing others for not having put some money on the table yet, or worse, for selling their gold. The top will be characterized by mania, both metaphorically and psychologically.
However, what we have now is consistent with signs of a stage two bull market, where gold begins to be featured in a skeptical media and is still generally ignored by the average Joe, though institutional investors begin to show some enthusiasm. After all, The Colbert Report segment wasn't really positive on gold; in fact, it was negative, trying to tie gold with a bunch of crackpots. But at least we're no longer in stage one -- if we were, there wouldn't even have been a segment in the first place.
As of late 2009, the news media are still negative on gold. Slowly but surely, though, people will warm up to it, laying the groundwork for stage three. Just be patient. Everything is still running on schedule.
Of course not. As I have mentioned before, when we're close to the top, everyone around you will be investing in gold, hoping to strike it rich. People who have no business speculating in gold mining stocks will be admonishing others for not having put some money on the table yet, or worse, for selling their gold. The top will be characterized by mania, both metaphorically and psychologically.
However, what we have now is consistent with signs of a stage two bull market, where gold begins to be featured in a skeptical media and is still generally ignored by the average Joe, though institutional investors begin to show some enthusiasm. After all, The Colbert Report segment wasn't really positive on gold; in fact, it was negative, trying to tie gold with a bunch of crackpots. But at least we're no longer in stage one -- if we were, there wouldn't even have been a segment in the first place.
As of late 2009, the news media are still negative on gold. Slowly but surely, though, people will warm up to it, laying the groundwork for stage three. Just be patient. Everything is still running on schedule.
Wednesday, December 2, 2009
Blow-off Top at Hand?
I have to admit that I am very surprised at how strongly gold has been acting these past several weeks. Gold is up over $16 as I'm writing this at 3 am. It's been making new record highs for a month now, and is currently well over $1200.
This reminds me of my experiences with silver way back in 2004. (Yes, I've been doing this for over five years now.) Silver usually acts just like gold, but much more viciously. Just before the crash, it went all the way to $8.25 an ounce (it's over $19 nowadays, by the way) from around $6 for a gain of almost 40%. Then it crashed, giving back the majority of its gains in just a week or two.
I'm hoping gold won't crash the same way silver does, but all good things come to an end, and a correction of 10% is healthy for a bull market. Sooner or later, the price of gold will suddenly drop $50, taking everyone by surprise, including me. In a bull market, the bull wants to shake you off, but as long as you hold on, everything will be okay.
This reminds me of my experiences with silver way back in 2004. (Yes, I've been doing this for over five years now.) Silver usually acts just like gold, but much more viciously. Just before the crash, it went all the way to $8.25 an ounce (it's over $19 nowadays, by the way) from around $6 for a gain of almost 40%. Then it crashed, giving back the majority of its gains in just a week or two.
I'm hoping gold won't crash the same way silver does, but all good things come to an end, and a correction of 10% is healthy for a bull market. Sooner or later, the price of gold will suddenly drop $50, taking everyone by surprise, including me. In a bull market, the bull wants to shake you off, but as long as you hold on, everything will be okay.
Wednesday, November 25, 2009
"We Sell Gold" and Other Signs
These past few weeks gold has been setting all-time high after all-time high. It reached $1150 an ounce last week and this week reached over $1190 an ounce. While in the short term gold could correct (and probably will, given how overbought it is), in the long run, we're still nowhere near the end of this bull market.
I'm sure you've seen everywhere the signs that say in big bold letters "WE BUY GOLD" in strip malls and on TV. Is this the top? Not at all. People are still skeptical of gold. After all, how many do you know who own gold? Aside from me and your crazy uncle, probably nobody else. We've left stage one of the bull market but we're still in stage two. This concept of different stages applies to all bull markets. In terms of gold, whereas in stage one only gold miners and crackpots were bullish, in stage two institutional investors, the so-called "smart money," have begun showing their interest. But among the general public, and even among the vast majority of Wall Street, there's still widespread skepticism about gold. It's a "barbarous relic" (which has been used as money for the past six thousand years), "it pays no dividends" (nor do tech stocks), "it takes up a lot of space" (you can fit a million dollars worth of gold in a cereal box, I'm not kidding), and so on.
When will we see the top? When we reach phase three of a bull market, the mania phase. How will we know it's the top? It'll be when your next-door neighbor can't stop talking about the latest killing he made on a junior exploration company in Mongolia. It'll be when cocktail party conversation revolves around grams per ton of mineralization. It'll be when investing in gold will be a "sure thing," just like how buying real estate was such a "sure thing" three years ago. It'll be when, instead of "We Buy Gold" signs everywhere, we'll see "We Sell Gold" signs everywhere. That's when it'll be time to get out before the lemmings fall off the cliff yet again, as they always have. And while everyone despairs at the collapse of the gold market, the sickening realization that that "sure thing" wasn't so sure after all, we'll be on the other side of the trade, shorting the hell out of gold and making money off the folly of others. But that's maybe six or seven years from now. Until then, I'll take my chances on the barbarous relic that's gained every year since 2001 over the "stocks for the long run" that have returned a total of 0% during the past decade.
I hate to make it sound like I'll be a wolf preying on sheep, but that's the truth of it. And though I might make it sound easy, I promise you it won't be easy. At every step along the way, you'll face obstacles. People will think you're crazy. No not just crazy, actually crazy. Your friends will ridicule you as mine have, and even your family will doubt you as mine have. But you must never let go. You cannot let the ephemeral emotions of those around you overrule the sound, logical reasons of why you're doing what you're doing. You must resist the crowd. And in the end, at the top of the bull market, people will praise you, they'll say you were a genius for seeing the light so early.
I've been doing this for many years now, and it's still not easy for me. But one day it'll all be worth it.
But only for one day, because as soon as people start praising my "intelligence" or "foresight," I'll know it's time to start shorting gold. It'll be time to take the unpopular road, to do the opposite of what others are doing, and to be called crazy once again.
The path to riches is lonely.
I'm sure you've seen everywhere the signs that say in big bold letters "WE BUY GOLD" in strip malls and on TV. Is this the top? Not at all. People are still skeptical of gold. After all, how many do you know who own gold? Aside from me and your crazy uncle, probably nobody else. We've left stage one of the bull market but we're still in stage two. This concept of different stages applies to all bull markets. In terms of gold, whereas in stage one only gold miners and crackpots were bullish, in stage two institutional investors, the so-called "smart money," have begun showing their interest. But among the general public, and even among the vast majority of Wall Street, there's still widespread skepticism about gold. It's a "barbarous relic" (which has been used as money for the past six thousand years), "it pays no dividends" (nor do tech stocks), "it takes up a lot of space" (you can fit a million dollars worth of gold in a cereal box, I'm not kidding), and so on.
When will we see the top? When we reach phase three of a bull market, the mania phase. How will we know it's the top? It'll be when your next-door neighbor can't stop talking about the latest killing he made on a junior exploration company in Mongolia. It'll be when cocktail party conversation revolves around grams per ton of mineralization. It'll be when investing in gold will be a "sure thing," just like how buying real estate was such a "sure thing" three years ago. It'll be when, instead of "We Buy Gold" signs everywhere, we'll see "We Sell Gold" signs everywhere. That's when it'll be time to get out before the lemmings fall off the cliff yet again, as they always have. And while everyone despairs at the collapse of the gold market, the sickening realization that that "sure thing" wasn't so sure after all, we'll be on the other side of the trade, shorting the hell out of gold and making money off the folly of others. But that's maybe six or seven years from now. Until then, I'll take my chances on the barbarous relic that's gained every year since 2001 over the "stocks for the long run" that have returned a total of 0% during the past decade.
I hate to make it sound like I'll be a wolf preying on sheep, but that's the truth of it. And though I might make it sound easy, I promise you it won't be easy. At every step along the way, you'll face obstacles. People will think you're crazy. No not just crazy, actually crazy. Your friends will ridicule you as mine have, and even your family will doubt you as mine have. But you must never let go. You cannot let the ephemeral emotions of those around you overrule the sound, logical reasons of why you're doing what you're doing. You must resist the crowd. And in the end, at the top of the bull market, people will praise you, they'll say you were a genius for seeing the light so early.
I've been doing this for many years now, and it's still not easy for me. But one day it'll all be worth it.
But only for one day, because as soon as people start praising my "intelligence" or "foresight," I'll know it's time to start shorting gold. It'll be time to take the unpopular road, to do the opposite of what others are doing, and to be called crazy once again.
The path to riches is lonely.
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