On this weekend’s Korelin Economic Report, Rick and Al Korelin discussed the uses and strengths of technical analysis. The audio for this interview can be heard here. The transcript is shown below.
Al Korelin: Hey, welcome in. You’re listening to a weekend special on the Korelin Economics Report. I’m Al Korelin. I appreciate you joining me. I’ve got my buddy Rick Ackerman on the line right now.
Rick and I are talking about technical analysis versus fundamental analysis. We’ve had an ongoing dialogue on this particular issue over the past few weeks with you folks out there. I wanted to get Rick to weigh in on this thing, because he is truly one of the experts, as is Trader Rog.
But Rick has been doing this for a long, long time. He’s made his living using technical analysis. He’s done quite well so far.
My first question, Rick, would be this. Number one, let’s take as an example the week to a few months coming up here. Now, I would say from a fundamental standpoint, the potential for a significant appreciation in the price of gold and silver is very, very high. That’s from a fundamental standpoint.
Why do I say that? Well, I say it because number one, Europe is literally falling apart. The odds are – in my opinion, based on fundamentals – I would say that Europe is probably going to be in worse and worse and worse shape, and possibly, very possibly, the Union, the Euro, et cetera, may collapse. That would have a huge impact on an upward movement in the price of gold and silver.
Now, fundamentals tell me the same thing is true in the United States. That’s why I remain bullish on gold and silver. How does technical analysis, Rick, relate to what I just said?
Rick Ackerman: Well Al, I think that the main problem with fundamental analysis is that often, when you follow it vigorously, you’re going to go insane. One good example, look at these gold stocks. You can pay a lot of money for a Krugerrand right now, $1,700. But you can buy that same gold in the ground as proven reserves from one of these mining companies, for a small fraction of that.
With gold in particular, you and I have visited some gold mines.
Al: Sure.
Rick: The gold is there. The one we visited in Idaho had potential. They had a strait there that was as big as one of the biggest U.S. gold operations. There was a lot of potential, 22-kilometer vein of gold.
Al: Yup.
Rick: The company was well-run and it had everything going for it. Of course, this penny stock was maybe 50, 60 cents when we looked at the mine. It’s been trading near a dime lately.
Al: Yeah.
Rick: What happens, when you use fundamental analysis, you might get all your facts right, but it’s the psychology that matters. Very poor fundamentals may produce high stock prices, if there’s some kind of mania going on. So it’s impossible to calibrate the fundamentals to the perceptions of investors themselves at any given time.
Al: Well, I would have to believe that in fundamental analysis, and I do have to say that it’s treated me really well over my career – very, very well. But having said that, emotions do come into play when you’re talking fundamentals. No, no. Let me rephrase that. Emotions can come into play when you talk fundamentals. I think that that’s perhaps the largest detriment to using that type of analysis.
Rick: Oh, I agree. I mean, I took fundamental analysis out of the equation because I’ve been a permabear for years. I’m always – in my essay side of my life – I’ve written for Sunday San Francisco Examiner and for Barron’s.
Al: Right.
Rick: A number of other publications. I’ve always been a bear. Always, “The sky is falling. We’re all screwed. Don’t even try to save yourself.”
Al: Right.
Rick: But I remember looking at one point at a chart of the Dow. This would have been in the early 2000s. I was still writing very bearishly for all these publications and in my own newsletter. But at a purely technical level, I saw something in the Dow. The Dow was about high 9000s and early 10000s.
If you were bearish, you would say, “Well this thing has been in a topping pattern for seven years.” But if I simply applied the mechanical discipline of my own technical system, there was a very obvious, unavoidable thing going on in that chart that said the Dow was going to at least 13000, which it did, plus a little.
So I’ve learned over and over again that regardless of what my emotions were telling me, the charts will never lie. That’s the way I play it.
Al: Okay. What do the charts tell you, Rick, in terms of the future for gold? I’m going to use six months, okay? I’m not going to go any longer, because I think it’s going to, from a fundamental standpoint, I think the price of gold is going to accelerate upward and the price of silver, within the next six months. What do fundamentals tell you?
Rick: What do technicals say?
Al: Yes. I’m sorry. Yeah.
Rick: Well, it’s interesting. We’ve been tracking… a lot of my subscribers like these gold ETFs – the junior miner vector for one. GDXJ is the symbol.
Al: Yeah.
Rick: And we’ve been kind of nibbling as it’s come down. I referred to it as just a piece of junk the other day. We get in and it just keeps going lower and lower and lower.
Al: Sure.
Rick: I can understand the frustration of my subscribers. But the irony here is that… I’m going to put aside the technicals for a bit and just sort of focus on the fundamentals that gold and silver in the ground are so cheap now. It’s so obvious that every investor in the junior gold stocks in particular is at a point of despair.
Al: Yeah. Rick: That’s really where you’ve got to buy them. I mean, the mere fact that there is such an air is reason enough to think, “Well, this is not the time to bail out.”
Al: Yeah, I would agree with you on that. But having said that, what do the charts tell you versus the price of gold and the price of silver over the next six months?
Rick: Something that’s severely oversold can always get more oversold. That’s the problem. Even at a technical level, I see a lot of these things sold to death. But it doesn’t mean that they can’t go still lower. So my tendency, like with GDXJ, I’m looking and I’m thinking, “Well, I have a series of targets. Downside targets. If one of them gets taken out, then I’ll simply bail out and try to buy in the next.” I would rather do that. I would rather have the task of getting back in than have these things take me lower and lower and lower. But let me also say that it’s funny, over time, gold and silver, bullion and the equity vehicles, seem to have gotten a number of traders. It’s like, even if you’re looking at things on a technical level, they’ll take you right to the limit. You’ll look and you’ll think, “Well gee, this thing is history.” They seem to know when the technicians are going to think about throwing in the towel, too.
Al: Okay. So we’re bringing in a bit of intuition here, for a lack of a better term. One last time. Gold right now is around $1650, just to say it in round numbers. Where does your analysis tell you that gold will be in 6 months?
Rick: I think it’s going to be higher. I think that at a technical level, just as I was mentioning, it’s going to take you to the max. But realize that gold spiked up to an all-time high of above $1900 last fall. The correction hasn’t been too terrible. I mean yeah, if you’ve been with it, you’ve been sort of dragged along for months and months and months. But on the other hand, the low of the correction has been about the low 1500s, $1528 I think for the June contract.
So it hasn’t been that bad. It’s really been grinding along. Even when it’s started to fall, there were technicians out there that said, “This isn’t going to be a quick recovery. We can grind this out for the next year.” If you take a step back, I think it’s possible to be objective and say it hasn’t been that too terribly bad. I don’t think it’s going to get much worse. Six months, I think will definitely be higher on bullion prices.
Al: So what I’m hearing you say is that technical analysis is not going to give you a specific number. Technical analysis is going to give you a trend. Is that how… correct?
Rick: Well, it will give you both, really. If you look at the long-term charts and you pick a low and a high, that’s what I call the impulse leg. But we’re at a big correction now. But even the low of the correction has not damaged the long-term trend. Also, within the correction, the moves themselves have not gone the distance. My technical method says essentially that good healthy bull markets produce corrective moves that do not reach their, what I call “the targets.” That’s the case for this gold correction. The bottom in December of 2011 did not nearly complete to the target. It got around $1528, but it could have gone into the 1300s to finish the move. So that’s a healthy sign.
But right now, the signs are it’s just not quite ready to go. But I’ll be watching on the lesser charts for signs of that turn, because you’ll never miss a trend reversal if you’re focused on the lesser charts. The big turns can’t happen without occurring on charts of lesser degree first.
Al: So you have to use technical analysis. It isn’t something… as I hear what you’re saying, is it’s not a static issue. Static issue being on, let’s say, the 21st of April, Rick Ackerman says gold is going to be, according to his charts, gold is going to be $2000 on October 4th of this year. You have to continue to monitor every single day using technical analysis, is that correct?
Rick: Yes, up to a point. It depends. If you want to be the first to know if gold’s turning around, you need to be on the lesser charts. I’m pretty diligent. It takes a lot of patience. But I’m mainly on the hourly chart looking for the turn, so I might miss the absolute bottom. But as I mentioned, the big trend can’t change without that occurring first on charts of lesser degree.
So I’m always promising my subscribers – especially the ones who take the course that I offer each month in this method of technical analysis – that if they stay focused on the lesser charts, they can absolutely never ever be fooled.
Al: Okay. There you have it, from Rick Ackerman. As always, the truth lies somewhere in the middle. Rick, thanks so much my friend.
Rick: Thank you, Al.