ARCHIVED COMMENTARY
Some Perspective
On Gold's Antics
For edition of May 30, 2006
The broad averages finished the week with a pre-holiday rally that was all but ordained, but it remains to be seen whether the uptrend will mutate into a full-blown short-squeeze next week. Meanwhile, gold prices firmed after a weak opening, achieving little net gain for the day. We have a hunch that both will trend lower over the near term, although, as mentioned in Friday’s Touts, we’re willing to reconsider the mildly bearish picture for gold over the near term if the June contract, currently trading around $651, can muster a run-up to at least 664.50. That number has significance for hidden-pivot traders alone, but its breach by no later than next Wednesday would likely suffice to end the correction from $732 that will soon enter its fourth week.
Whatever happens over the next 7-10 days, we know at least one gold bug who’s not about to become anxious or impatient. We are referring to our good friend Chuck Cohen, a Manhattanite who has long been a regular contributor at Bill Murphy’s Le Metropole Cafe. The following dispatch from Chuck reveals the mindset of someone who is well prepared to take gold’s spills, thrills and chills in stride:
“Did you ever hear an inner voice that keeps whispering a certain word. Well once in a great while, I do. Today, I keep hearing the word, ‘perspective.’ I decided to look up the word to see how it is defined; Here are some of its nuances:
Time to Reflect
1) A view or vista.
2) A mental view or outlook: ‘It is useful occasionally to look at the past to gain a perspective on the present’ (Fabian Linden).
3) The relationship of aspects of a subject to each other and to a whole: a perspective of history; a need to view the problem in the proper perspective.
4) Subjective evaluation of relative significance; a point of view,
5) The ability to perceive things in their actual interrelations or comparative importance: tried to keep my perspective throughout the crisis.
“But what does this have to do with gold and markets at this particular time in history? Everything! To illustrate, let's look at some of the evidence that we have now.
“Since 2001 gold has almost tripled while the HUI rose from top to bottom about 9 or 10 times. And since 2000, I have identified three specific, sizeable corrections to the price of the shares. Each is different in personality, but each has been scary enough to cause the share holder to panic. It is interesting to note that all through the rise, we have not seen a foaming-at-the-mouth panic to get in such as we saw in stocks during the late 1990's.
A Time of Fright
“The first correction came from May through July 2002 after a 400% rise in the HUI, and within three months the HUI sold off in a panic that made 1929 and 1987 appear calm. From top to bottom the HUI dropped a little more than 35%, with some companies like Goldcorp being cut in half. That was a time of fright.
“But then from the panic bottom HUI then rose 275%. It had now gone from 40 to 250. That meant that those who had bought and not sold, reaped the benefits. But another correction set in at the end of 2003. This was different from the first one in that it focused more upon the smaller companies. Many of them dropped 75% off their highs as the selling persisted day after day, with most of the selling hitting the bids. It was very painful because, unlike the first time, it stretched out almost two years. A short sell-off is one thing, this was another. It was personally very painful. The one in 2002 was like a shock; this one, more like a lingering illness without any relief.
“But then the HUI, which was about 160, rose quickly to a top of exactly 400 just a couple of weeks ago. Do you get the pattern here? Stocks in a bull market go up, and then scary corrections come. The investors who do the best may not always sell at the top, but they recognize the bottoms because they have a perspective that keeps them calm. To what has the great investor, Warren Buffett, attributed his immense success over the years? "I buy when everyone is selling and sell when everyone is buying." Pretty simple, but profound. Buffett admits he is not a trader in a major trend, and it has affected him too much. I like to read and absorb the wisdom of successful investors. You have a few of them in gold.
The Latest Correction
“That brings us up to the latest correction. It came after a frenzy of commodity buying--commodities of all kinds. Gold was inserted into this group as if it were zinc or copper. When the correction or profit-taking arrived, gold and the mining shares sold off with the rest. A relieved and gleeful mainstream media that had never understood why gold went up until the top, now declared the move completed and fully justified. This time they saw the bubble from afar. They weren't going to get tricked like they did back in the 1990's. They finally knew what a bubble looked like, and they could congratulate themselves for not getting trapped in this latest Ponzi scheme. ‘Take that, you arrogant gold bugs and naysayers! You are getting what you deserve! You should have bought Intel and Microsoft instead. You don't see them crash.’
“But as I have mentioned, gold-share corrections might have different personalities, but they all share some things in common. To wit, they are scary, and they will tend to cause irrational decisions. They plant fear and doubt in the heretofore unshakeable bulls who now must reconsider: ‘Is it all over? Should I pull out and look elsewhere, or perhaps, just go into cash?’ It is a sad fact that many who had bravado and firm convictions about a historic bull market are now out of the precious-metals move due to one or the other of the corrections. Some are out for good; others are waiting to get up the courage to put their toes back in. That is why I hear the word ‘perspective’ so loudly at this time.
Shares vs Gold
“Now to the latest selling. During the past two weeks, we had a major non-confirmation between the metal and the shares. This is always a warning signal although sometimes it has failed during this great rise. But it did come this time, and it came violently and differently from the other two. Here are some of the characteristics of this one that tell me that it is just a correction that will soon end, and then a new leg up will begin:
1) We have had a remarkable four major gaps down over the past 11 days. Extremely rare!
2) We have had consecutive bad openings or sell-offs on the past two Fridays and Mondays. I would guess that this is unbelievably rare as well.
3) Goldcorp, the proxy of the gold-share market, until this period averaged about five million shares daily; over the past nine days, the stock has averaged about 14 million shares daily. If you go back and look at major bottoms in stocks, it usually occurs when the leader, which used to be Microsoft or GM back in the old days, has just a day or two of enormous volume. This one has occurred over 9 days. Unreal.
Media Ignored Rally
4) Finally, everyone and his sister knows how scary this sell-off has been. During the entire move up, gold was barely whispered about in the media. But now, the commodity bubble is on every front page and on the lips of every financial announcer. We have been warned continually about this bubble. There will be no blood on their hands.
“My conclusion is that, even though this latest panic has taken many stocks down 30% or so from their highs, in essence it is no different from previous panics. Indeed, you can be sure that once the last seller has dumped his stock, precious-metal shares will renew their historical move, this time bringing an unprecedented speculation in the smaller miners.
“One final lesson. Remember the Crash of 1987 that covered the front pages of all of the newspapers? I think everyone remembers that the stock market declined 505 points that Monday, or an incredible 20 percent in one day, and a total of 35 percent in just six weeks. That seems all the more amazing when one considers today's market, when even a 50 point drop is considered noteworthy. But what is especially noteworthy is the fact that whoever bought that day, if they held without for the next decade, would have made seven times their purchase -- and that doesn’t include the huge extra bonus they’d have reaped if they’d stuck with the Nasdaq.
“Don't let your perspective be shaken by these emotional days. They are historic buying opportunities, just as existed at the bottom of gold’s last two corrections, and just as they were in 1987.
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Hidden-Pivot Seminar
Quite a few of you have indicated you are likely to attend the hidden-pivot seminar in New York this October. I’ve also heard from about a half-dozen Australian readers and subscribers who said they’re interested but that it would be too far to travel. However, I’m willing to come to Sydney or Melbourne if I can fill a class, so let me please hear from you if that would work.
The New York session will be a no-frills version of the course that I gave in Denver, offered at a significant saving over the original price. After that there will probably be just one more session offered – in San Francisco, late in 2006 or early 2007 -- but that would be the last for a long while.
The course includes post-grad mentoring via a chat group that some of my former students have set up. If you’ve been impressed with the accuracy of my forecasts, this is an opportunity you should not pass up. Please let me know via e-mail if you are serious about coming.
