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The Trend Is Our Friend…Until It Ends

By Rick Ackerman Posted on October 12, 2011, 6:39 am EDT Last Updated October 12, 2011, 12:45 pm EDT

[Our friend Rich Cash, a seasoned trader who has been through many bull and bear markets, has come up with some eye-popping numbers below for some of our favorite trading vehicles.  Silver at $10 an ounce when the Great Recession becomes something much worse? It’s just speculation now, but the point of the exercise is to mentally and psychologically prepare us for…anything. Read on for an old pro’s take on shifting paradigms. RA ]

In August 1987, inspired by fellow Merrill Lynch Alum Arch Crawford and Harmonic Convergence bullish market hysteria, we commissioned a high net worth productive enterprise conclave at the Chemical Club, with its downtown view of the World Trade Centers and Statue of Liberty, all overlooking what was one of the busiest harbors in the world, since displaced by central planning mercantilist Shanghai, Singapore, Hong Kong and 9-11. Our topic was the unpopular if accurate one: The End of the Trend? Our turnout was less than the recent Buffett Obama Wall Street fundraiser at Four Seasons, “Tax Hikes for the Rich.”

At the end of the trend, no one wants to hear about the end of the trend.  No one believes it and few bring themselves to trade it. So what if we are in decade-plus equity bear market, gold commodity bull market and  three-decade bond bull-market trends? Is there anyone on the street who thinks it even remotely possible that currently profitable paradigm trends will end? No? And we are unanimous in that. What about a Gedankenexperiment (thought experiment) financial fantasy just for fun and profit? Suppose Long Treasury interest rates, 2.694% as this is written, actually continued down to their current target of 0.8%, dead-as-a-doornail depression levels? Would it be fair to say there might be some changes in other asset prices? No man nor market is an island in Abu Dhabi.  Would this matter to a world apparently running out of affordable fuel, housing and healthcare, clean air, constitutional rights, fresh water, healthy food, private communications and safe travel?

Adapt or Die

Suppose Silver prices, in April as high as $49.82, continued down toward their depression target of $10, ten times the silver dollars some of us collected as kids? Will people sell their silver to return to bank dollar deposits if 10% fractional reserve financial institutions ran out of cash, were forced to mark mortgage loans down to market value to stay in business, while government revenues collapsed? By this time, certain Rick’s Picks readers are no doubt extremely uncomfortable with these trends and what they may mean for our future financial welfare.

No one has a crystal ball, but it is worth noting trends do change and we traders adapt or die. Meanwhile, we were 99.65 percentile yesterday with the CNBC Contest, just trailing the trend stopping changes in and out. Maybe the paradigms shift soon, so let’s resolve here now to do more of this profitable, simple trend following while stopping changes in and out, no matter where markets go this fall.

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  • Rich October 16, 2011, 6:58 pm

    Just caught an error in the essay for which I apologize. Silver outperformed bonds and stocks the last decade, not the last 30 years. Thanks all…

  • bill October 13, 2011, 7:24 pm

    When silver goes down to 30, dealers start running out. So what does that tell you?

    • Rich October 13, 2011, 8:27 pm

      It tells us people who missed the market can be more bullish after the peak for awhile until they throw in the towel. In 1980, after silver hit $50 an ounce briefly, people bought down to $4 for 24 years:

      http://silverprice.org/silver-price-history.html

  • Robert October 13, 2011, 3:33 am

    $10 per ounce only has impact if you can define what a dollar is.

    10 FRN’s per ounce? let me be as succinct as I can… No effing way.

    Who watched the 10/3/2011 CNBC interview with Dallas Fed chief Fisher? He said specifically that the Fed is currently fighting a battle to “maintain the legitimacy of their franchise”

    Fisher knows that the Fed only has one purpose, and that is to devalue the value of all previously issued Federal Reserve bank notes.

    If they (the Fed) stop doing that, then they eliminate their entire reason for being. Ron Paul will have won without a single piece of legislation ever going to the floor.

    Once the magical dollar machine is unplugged for good- the Fed would implode from within.

    I repeat… no effing way.

    Not that I would care anyway. In a world of $10 silver (seeing a reversion to the 2001 price level), I guess we would also see $1.75 gasoline, and the average median income in the US would drop from $40k per year back to $27K…

    But hey- it’s fun to entertain preposterous scenarios, because the sloshing effect of all that loose liquidity in global markets makes just about anything possible I guess.

    A long term P&F projection is merely a flight of fancy. One only need take a census of all the 3 box reversals that occur in any given symbol over the course of a single year to see that P&F projections only get met when the current price is within 2 std deviations of the projection price- otherwise, you can bet on a long term reversal with near 100% certainty.

    • Rich October 13, 2011, 5:12 am

      Way Robert…;
      The purpose of the essay was to keep an open mind with fixed stop loss discipline re the unexpected to trade successfully.
      You are absolutely right the 1450 SPX target trend could turn down again below 1170 in a heartbeat and may have even begin today.
      Debt derivative default potential currently far exceeds productive ability to service debt usury, something it took Irving Fisher, according to Milton Friedman, America’s greatest economist, the four years from 1929 to 1934 to figure out re why his forecasts were wrong.
      There is so much more debt this time, that the Fed’s dual mandate of employment and price stability may self-destruct no matter what anyone says.
      Time will always tell the truth: Debts will always be repaid or repossessed one way or another…

  • gary leibowitz October 12, 2011, 11:10 pm

    When will gold/silver run counter to the stock market. It must in order for most assumptions on gold’s rise to work.

    • rich October 12, 2011, 11:15 pm

      Well GL, with Silver PnF targeting 10 and SPX targeting 1450, how about now?…

  • constman October 12, 2011, 7:21 pm

    Silver and gold may not feed you. You might want to cash it in for some excellent farmland. You can lease it out for now and if need be you can always live on it and survive if things are really that bad.

    • rich October 12, 2011, 11:14 pm

      Good thought c.
      One reason Ag Banks foreclosing fertile farmland…

  • dan October 12, 2011, 7:10 pm

    whatever price of silver or gold goes up or down to ..will be worth more than your paper assets…

    • gary leibowitz October 12, 2011, 10:27 pm

      Not likely in a deep deflation cycle. Cash always does well. Gold and Silver will not be backed by the government and as such they will do everything to discourage its purchase.

    • rich October 12, 2011, 11:19 pm

      Dan, I am inclined to agree somewhat with Gary after watching gold go from $1000 in 1980 to $255 in 2000 20 years later…

    • fallingman October 16, 2011, 4:38 am

      Let’s suppose, just for the sake of supposing, that silver goes on to trade at, say, $200 clownbucks an ounce.

      Are we gonna hear from any of you silver-to-$3.50 people then? Will you acknowledge what you said here today was BS or will you just keep your mouths shut and pretend you never said anything?

      Look, I’m literally in at $1.29 on the bulk of my position. ($7.11 and $11.29 for the rest of it.) How many of you geniuses bought back at that price? NO? You didn’t? What? Did you miss something? Yeah, I guess so. But I should listen to YOU now?

      And, have you ever heard of put options? Yeah, I’m so scared. I make money no matter what happens.

      Long term forecasts such as this are, how shall I say this, UTTERLY WORTHLESS. But hey, it’s just my opinion. What do I know? I just bought silver at $1.29.

    • fallingman October 16, 2011, 4:51 am

      Look dude, if you don’t know that gold crested at around $850 for about 5 seconds in 1980…not $1,000… and that the actual high price, minus the fleeting spike, was in the $600’s, you have no credibility.

      I was there. Where were you? Did you live through 1980 and the subsequent collapse? Were you at the NCMR convention when Jim Dines told the stunned audience that the top was in and there would be 20 years of disinflation to come? I was. I talked to Jim then. I didn’t believe him. I’ve learned a few things since.

      Jim Dines is the FATHER of point and figure. Last I checked, he thinks the clownie is doomed and you’d be a fool not to maintain a position in gold and silver and the miners. But what does he know? He’s just the one that got me into silver at $1.29.

      Bottom line: I don’t know what gold or silver are gonna be priced at in the future…AND NEITHER DO YOU! But I’ll match my track record against anyone’s.

    • Rich October 16, 2011, 6:53 pm

      Fman, your angry insulting ad hominems have no place here where they subtract.
      They do not render your false statements true.
      Why the chip on your shoulder, so large as to misinterpret what I actually wrote?:
      “No one has a crystal ball, but it is worth noting trends do change and we traders adapt or die.”
      I hold and make no pretensions to predict the future.
      In fact, the 0.8% Long T Bond target changed to 4.3% the day this essay written the week before was published here.
      Why would you want or deserve to hear from me if silver goes to $200 an ounce?
      I did not write it would not.
      Silver may go to $10 and $1000.
      Fact: Silver already traded at $806 in 1477 in 1998 dollars. Gold traded at $2400 in 1492 by the same metric.
      Both were a lot more scarce and less controlled back then.
      Gold and silver are in fact well below their inflation adjusted 1980 highs.
      Anyone who is a blind golden calf or silver bull believer may get their head handed to them and their assets lost. Perhaps that fear motivated your posts?
      FYI, I acquired silver dollars from $1 silver certificates exchanged at the bank in the Sixties and saved silver coins as a kid paid for gardening and paper route, and exchanged them at much higher prices for paper in 1980.
      FYI, I was at Merrill Lynch trading gold and silver on 21 January 1980 and the COMEX Gold futures on the Quotron actually traded up to $1050 on the spike, which prices were later thrown out, as still happens daily with quote vendors all the time.
      The $850 you are referring to was the London Bullion Pool price fix at NM Rothschild on St Smithin’s Lane. (Rothshilds sold to Barclays in 2004 as they got out of many of their banking interests near the top.)
      In January 1980 I had Merrill clients who owned family gold double eagles from $20 and $35 an ounce, and did not hedge or sell. They died before gold got back to where they could have sold 20 years later.
      So far as Jim Blanchard, Burt Blumert, Jim Dines, Foundation for Economic Education, Freeman, Henry Hazlitt, Jack Kemp, Ron Paul, Nurray Rothbard, Harry Schultz, I was with them, some in person, before some of them effectively legalized Gold ownership again in the USA under Ford, after Nixon closed the Gold window and put in price controls on 15 August 1971 that failed with his Presidency. I owned 1.2 ounce Gold Mexican 50 Peso coins before American Gold Eagles were minted in 1986.
      One friend, currently standing for President, endorsed my 1994 Congressional Campaign to Renew Congress by Balancing the Budget, not a popular campaign compared to Free Lunch and Tax the Rich.
      I shared correspondence with Milton Friedman and Alan Greenspan re the Gold Standard on why both of them repudiated Gold after Greenspan advocated it in in his essay, ‘Gold and Economic Freedom’ in Ayn Rand’s Objectivist (1966) and Capitalism, the Unknown Ideal (1967).
      Re put options, I often made the point with Rick here that naked puts are one easy way to lose money, along with holding leveraged Exchange Traded Funds over time.
      I have found that when we fear something like lower precious metal prices enough to attack others for their ideas, it may come to pass.
      Good luck FMan…

    • fallingman October 17, 2011, 3:16 pm

      Yeah, sorry. I was actually responding mostly to someone else. And then I wheeled on you for the $850 comment.

      I actually thought your comment and the gist of your message “At the end of the trend, no one wants to hear about the end of the trend. ” was spot on and should have said so.

      I was a case in point, in fact.

      The truth. I was a little schnockered and irritated at the time? Could you tell?

      Bad combination.

      Anyway, you are correct. My comments were uncalled for and unbecoming. My apologies.

      Thanks for your article and follow-up.

    • Rich October 18, 2011, 11:08 pm

      Fallingman, thanks for the additional comments.
      Generally enjoy your posts…

  • nonplused October 12, 2011, 6:26 pm

    Rich, are you suggesting a deflation which returns the value of an American Eagle to $50 (it’s face value) is possible? I’ll take the other side of that trade. There might be some future currency that trades 50 units to a gold coin, but it won’t be a Federal Reserve Note. A nice car will cost 500 of those currency units, whatever they are. Silver coins stamped $5, might be the basis for this new currency but you wouldn’t dream of trading a silver coin for 5 Federal Reserve Notes now and you never will again.

    • rich October 12, 2011, 11:13 pm

      With respect NP, never is a very long time.
      The Silver Eagle has a face value of $1.
      The Big picture as Jefferson et al warned, is Bankers inflating and deflating the economy to lend and repossess…

  • Phil De Basquet October 12, 2011, 4:20 pm

    No inflation? The constant printing of money does not produce inflation? Sell my silver, OK. For what? USD, not what i want to hold.

    • Rich October 12, 2011, 5:22 pm

      If we define inflation as a monetary phenomenon, then yes, the Fed created inflation, with the 1980 Methodology CPI at 12% and rising.

      If we define inflation as an economic asset phenomenon, then no, upside down derivative Banks did not use increased money supplies to lend to productive enterprise, so the economic trend continues down during this Jubilee Kondratyev Long Winter.

      The argument for silver is that unless it is stolen, it does not have counterparty risk like derivatives and fiat. Therefore, $10 monetary silver reserves might buy a car, house or farm if asset deflation gets bad enough.

      The deflationary argument against silver is that it is also an industrial metal and economic contraction drives industrial prices down.

      So far silver outperformed bonds the last 30 years, but that trend may change as more people realize what’s happening…

      Ron Paul suggested last night at the Dartmouth Presidential Candidate Roundtable that Greenspan may one day return to his gold standard stance of 1966.

      The face value of Gold American Eagles is $50…

  • $10 Silver at Depressionary Bottom? A HIGHLY Optimist Expectation October 12, 2011, 3:59 pm

    I consider a $10 silver-oz. price to be, at the depressionary bottom, to be a HIGHLY optimistic expectation, specially in comparative projection to long treasuries going to 0.8% interest, as the article above contemplates.

    Because silver started it’s current rally in 2001 at BELOW $4 an ounce. Therefore, historically, BELOW that $4 price, is where it should return, when the current 10 year inflationary period, finally crashes into a “dead-as-a-doornail depression level.”

    So I’d easily say, that $3.50 an ounce is a more realistic estimate at the depression bottom than $10 silver. And that is 66% lower, which would represent a huge loss for you, if you risk buying silver at $10, during depressionary times.

    • Rich October 12, 2011, 5:07 pm

      Aloha and Mahalo All, with some afterthoughts a week after writing this:

      The 0.8% Long T Bond and $10 Silver targets are the current (mostly unexpected) Long Term Point and Figure targets, quite subject to change at any time, one reason passive indexing of assets for buy and hold can be quite costly if/when trends change.

      Broad monetary velocity trended down since 1 Jan 1981 when bond yields peaked, meaning it takes more and more Fed fiat dollars to get the same GDP effect. At some point this trend too may end when government stops crowding out the economy and our economy becomes more productive, but not yet now .

      In the meantime, most of that excess liquidity seems to be going into the stock market, with SPX currently targeting an unbelievable 1450.

      All of these trends are counterintuitive, and suggest how valuable Rick’s Picks can be to financial survival and success…

  • John Jay October 12, 2011, 2:44 pm

    I don’t know about the stock market, but the Treasury bond market is being supported at these levels by the Fed buying and selling with digital money they create on a whim. The question is, can they keep it up? It depends if the Euro helps them out by vaporizing among other things. They have created a ZIRP monster which is all that stands between us and collapse. Normal, market set interest rates would spell doom, and they know it. Someone with better insight than mine could probably think of a scenario where the Fed gets outflanked and our bond market “Goes Greek” with 150% short term rates. I am starting to see Joe Six Pack union types showing up at the various Occupy this and thats. After 40 years of getting screwed by the system, they are finally waking up. It is probably too late now.

    • Rich October 12, 2011, 5:43 pm

      Dear JJ
      Joe Six pack may vote for Ron Paul before 0 or any GOP candidate, thus the increasingly desparate obvious attempts to marginalize the only member of Congress to talk straight and ever hit a home run at the annual Congressional baseball game (at 75).
      Schumpeter, an Austrian economist like OBGYN Ron Paul, described Jubilee Winter as “Creative Destruction.” Only restoring life and liberty as our founding families intended can fix our economy and markets…

  • Other Paul October 12, 2011, 2:43 pm

    Why would anyone think that “this time (2011) is different?”

    Most policians understand the social chaos that would follow a “let ’em fail this time” for financial institutions. When the going gets tough, fiat is printed or is digitally sent to bank accounts. The US Gov’t already sends out all kinds of checks/deposits each month to tens of millions of Americans. It will continue.

    Look what happened this summer. The debt ceiling was raised. The world didn’t end. The dollar has gone up in value, gold down.

    The only run I see is to sub-3% Treasuries. .10% 10-year US Treasuries. Why not? Japan’s been doing it for years.

    As I written in this space before, wake me up when the bank runs start in the US.

    • Rich October 12, 2011, 5:37 pm

      OP, while a big bad derivatives bankruptcy or more could wipe out equity shareholders, financial debt defaults could actually release seismic financial pressures on our economy to calm the waters…

  • charles October 12, 2011, 2:18 pm

    “No one has a crystal ball, but it is worth noting trends do change and we traders adapt or die.”

    Perfect! Enough said!

  • Stefan Grieb October 12, 2011, 1:53 pm

    It is true that the trend is your friend until it isn’t. You are absolutely correct that trends do change and those who refuse to accept that are doomed to sit paralyzed completely through a trend change.

    My point to you is they are not symmetrical and do not necessarily move together. Market classes have a solid track record of moving to extremes before changing direction.

    As of this moment the only thing I see as extreme is the bond market. Equities certainly are not extreme at this time and neither is Precious metals.

    • Rich October 12, 2011, 5:32 pm

      Very true Stefan…


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