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    SCAREDY CATS


    April 19th, 2010

    Comments (6)
    Read by 47 people

    Alas, poor gold bug; I knew him Horatio. He had the brains to be perfectly positioned in the great gold bull market of 1999-2020. Yet he did not make any money from his wisdom. Take, for example, the sell-off of April 16, 2010. Gold was just about to make another powerful move to the upside. But the sell-off scared him away, and he missed the move. What was it that he did wrong?

    katz_041910aThose who read these articles know that I am a big chart man, and last week’s action in the markets is a good example of why this is so important. There is much to be learned from the charts, but the most important is perspective. When one looks at any object, perspective is very important. Take, for example, a mountain range. One can see it from a satellite picture taken from earth orbit. One can see its majestic beauty from a few miles away (where it dominates the horizon). Or one can focus on a single daisy on the mountainside on a summer day. These are three different pictures, and they carry three different emotions.

    The vast majority of your fellow traders (against whom you are competing) are not chartists. The emotion with which they see the market roughly corresponds to the emotion of the average trader. He remembers the market action for the past few months, and what has happened further back sort of fades into the distance.

    First, as soon as you start to trade the market and have your own money at stake, your perspective changes radically. You see everything through a microscope, as it were. Time slows down, and everything becomes much more vivid. Now, what is the message of the above chart?

    The answer is clear. Gold is moving sideways. Isn’t it obvious? Well, not exactly:

    katz_041910bThis is why I usually emphasize the 10-15 year chart. It gives an entirely different picture. Gold is going up.

    Well, what is it? Is gold moving sideways, or is it moving up? And this is not just a matter of semantics. The question is being asked from the very practical viewpoint of how do I make the most money?

    In theory, it might seem that one can make money at either level. Either focus on the short term and play the up and down moves, or focus on the big picture and hang on tight for the big move. But over a century of trading by some of the country’s best has given a different answer, and I never tire of saying it. THE BIG MONEY IS MADE IN THE BIG MOVE.

    Yes, you can catch a short term move. You can catch many of them. But the short term is too hard to predict. Take, for example, Friday’s decline in gold. It was caused by the U.S. Government’s lawsuit against Goldman Sachs. Like many other events which move the markets this was almost impossible to predict for two reasons.

    One can imagine aggressive fundamental traders who employ a host of flies on the wall who travel over the world and spy on the key events which will move markets. One of the flies is in the U.S. attorney’s office in Washington, D.C. Another fly is in the office of the oil minister of Saudi Arabia. And another fly has infiltrated into a radical terrorist group which is planning to blow up an oil pipeline. (And then there are 4,567 more flies at various key points around the world where market-moving events are likely to happen, all ready with their cell phones to report in as soon as an important news item comes their way.)

    But even if your army of flies is ready to go, you face a second problem. You can be the smartest economist in the world. You can correctly forecast the economic results of all the news your flies bring to you. But how do you know how the markets will interpret that news? The most famous example of misinterpretation of a news item was Nixon’s imposition of price and wage controls on August 15, 1971. If your fly on the wall in the Oval Office in August 1971 had reported this to you, then, being a good economist, you would have said, “Wow, this means that Nixon is planning to print money. This is bullish for gold. I’m going to buy.”

    But the stupid traders in the markets said, “Wow, the great leader is taking decisive action against inflation. This means that prices will not go up. Therefore, I’m going to sell gold.”

    Now the stupid traders were wrong in the long run. But there were so many of them that they dominated the markets in the short run, and both gold and gold stocks went down. And this is another serious problem with fundamental analysis. You can have flies on the wall all over the world. You can correctly analyze the economic effects of the events they report. But you can never be sure that the market will agree with your analysis. All your good work goes down the tubes because of that large majority of stupid people (at least stupid compared to you) who move the market in the opposite direction from what it should be.

    A good example of this is Friday’s attack on Goldman Sachs. If you can remember back two years ago, when the Wall Street bailout passed Congress, candidate Obama supported it. This support was crucial because it allowed the Democratic members of Congress to vote for the bill, and it was the Democrats who provided the votes needed for passage. So in a very real sense it was Barack Obama who gave the $750+ billion to Wall Street (most of which ended up at Goldman Sachs).

    In short, the entire anti-Wall Street aura of Obama’s lawsuit against Goldman is for show. It is to convince the stupid public that he is against the rich. Democrats have done this since the New Deal. Rich Americans are willing to put up with this anti-rich rhetoric as long as the Government keeps stealing money from the average American and giving it to them, and they prove this by donating money to New Deal politicians. Nothing has changed for 77 years. The only difference is that the original New Dealers were more subtle about it.

    So for traders to fear that Obama is suddenly turning against the rich is naiveté of an extreme kind. It is the exact same type of misinterpretation of a news event as the price controls of 1971. In the One-handed Economist of April 16, 2010, I present my argument that Friday’s decline in gold presents a buy opportunity.

    If you compare the two gold charts in this article, you will come to understand the importance of the observation that the big money is made in the big move. It has occurred to many people to focus on the short term and buy the dips and sell the rallies. This can work for a while. But sooner or later the market puts on a good move, and then you are left behind. It is well known, for example, that in the options’ markets the option buyers usually lose, and the option writers usually win. This is because the buyers are too focused on the short term. They get overexcited by the prospect of big profits in a short period of time. So they rush in and overpay for their options. This is all the writer needs. He plays it conservatively, gets the odds on his side and plays the percentages. He is a winner. The short term buyer is a loser.

    The proven path to success in the markets is to latch on to a long term move whose cause is not understood by most traders. This fundamental cause will dominate the markets, and it is most visible on the long term chart. It took almost 5 years for gold to form its saucer bottom, and one was best advised to be otherwise occupied during that time. But once the saucer broke to the upside (Dec. 2002) that was the signal that gold was going up. And it has been up ever since.

    We are a long way from the end of this gold bull market, and the best way to make some pretty pennies from it is to keep focused on the big move. Keep in mind that long term chart, and expect reactions or consolidations to occur for periods of about half a year. Design for yourself a strategy within your means which will being in the profits as the long term move unfolds.

    Getting out near the end of the move is another problem but is not too difficult. It is some distance in the future, and we can leave this problem to another day. Right now the danger is not that we will overstay the top. It is that we will be scaredy cats and sell too soon. In this way, the market runs away from us, and we are not in it.

    To guide you and help you to execute such a strategy, I write an economic letter, the One-handed Economist, on a fortnightly (every two weeks) basis. I was a gold bug in the 1970s, a stock bug in the 1980s and ‘90s and am a gold bug again at the present time. The One-handed Economist costs $300 per year. You may subscribe by visiting my web site, www.thegoldspeculator.com and clicking on the Pay Pal button, or you may subscribe the old fashioned way by sending a check for $290 ($10 cash discount) to The One-handed Economist, 614 Nashua St. #122, Milford, N.H. 03055. Note, OHE is dated every other Friday and mailed on Saturday or Sunday.

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    6 Comments...

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    1. Tony says:

      Why would anyone want to invest in a security that trades in dollars? No matter how good the company is, the dollar will kill it. Reason being, is the fact that there is no “new currency” in place.  The risk would be taken away if there was another currency in place along with a transfer ratio of value from the old currency (dollar) to the new. Without that there are too many unknown variables which makes EVERY SINGLE stock, etc that is traded in dollars EXTREMELY DANGEROUS and likely to collapse in a currency crisis.

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    2. manos says:

      I know one thing. When my daughter was born in 2003, i bought 50 golden British pounds for 91 euros each.
      Today they sell for 229 euros, and climbing.
      It’s not like i invested in the Ali Baba treasure, but i have some small gain, didn’t lose for sure, and have some hard currency on hand for the SHTF case.
      I don’t know if the gold will continue the upward course, or where is the upper limit. But it’s better than the worthless paper crap we receive for monthly salary.

      Manos

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    3. Willie Wonka says:

      Tony,

      Because PM’s will detach themselves  from those dollars when said paper becomes worthless and the PM’s will become the currency, at least for awhile, and if we really get the reforms we are all trying to get , the gold standard will return making it even more valuable.

      “Junk”  silver is your best investment in my opinion.

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    4. Steve Richards says:

      By his Executive Order 6102 signed on April 5, 1933 – U.S. President Franklin D. Roosevelt forbade “the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates” by U.S. citizens. In fact, Executive Order 6102 required U.S. citizens to deliver on or before May 1, 1933 all but a small amount gold coin, gold bullion, and gold certificates owned by them to the Federal Reserve, in exchange for $20.67 per troy ounce. Under the Trading With the Enemy Act of October 6, 1917, as amended on March 9, 1933, violation of the order was punishable by fine up to $10,000 ($166,640 if adjusted for inflation as of 2008) or up to ten years in prison, or both.

      So somebody tell me why I should buy and hold any type of gold coin, bullion or certificates if when everything goes to hell (SHTF) Goldman Sachs and Jamie Dimon at JP Morgan/Chase will have their buddies in Washington pull the same ‘ol crap? I’ve been a fan of Celente’s for a long time and subscribe to his Trends Journal. However, while he preaches we should own gold, he also constantly mentions the Roosevelt confiscation and indicates it could happen again. So again, I ask… why should I own gold?

      Let’s look ahead. The shit HAS hit the fan. The world is in turmoil. The US dollar isn’t worth the paper its not printed on (as Celente likes to say). Wonder bread is now $10,000 a loaf.. and it’s a wonder if one can find any. People are bartering for things:

      “Hey dude! Ya want my cable modem in trade fer that bag ah tomaters? The guvvment’s got the Internet locked down anyway.”

      “Naw man… ya gotsta have gold! Ya got one of dem gold eagle’s?”

      “Git reel! Ya know dat de guvvment done confiskated dat stuff!”

      And who’s going to determine the value of that bag of tomatoes? The seller of course. However, if there’s competition from the farmers market stall next door, he might want only half of a gold eagle. So like in past times, people will go whacking gold coins in half or in quarters and hope some alphabet agency doesn’t catch ‘em with a handful of gold. Maybe that’s why this tomato seller is selling his at half price… he’s really an FBI undercover agent. Oh… sorry… I meant GIA (Gold Investigative Agent).

      Sheesh! And here I thought I’d just push a gold bar into the debit/credit card slot on the gas pump to buy that $8,474 dollars worth of gas!

      I’ve been listening to the gold bugs for 30 years. I bought $5,000 worth of gold back in ’72 when it was $100 per ounce. I got all excited when it hit about $650 in the early 80’s. I should have sold.

      In the late 90’s it started falling and when it hit around $280 in ’98 I said, “To hell with it,” and sold. Not much profit in 25 years of holding it after all the fees. Now it’s rising again. I hear the radio ad’s and watch ‘ol Gordon Liddy and other’s on TV exclaiming how high it can go. Some claim to $5,000 per ounce.

      Yeah, maybe. Anything’s possible. But if it gets that high what are you going to exchange it for? Inflated dollars? And who’s going to exchange it? The gold dealers will be out of business. And, maybe FedEx, UPS, and even the Post Office will be out of business or closed. If you’re holding physical gold, how are you going to get it to a dealer even if they are in business? And, what if the government has put out another confiscation order?

      I’d rather take my chances on commodities. Commodities as in hoarding “stuff.” All kinds of “stuff” people will need for everyday lives. Not only emergency food. From toothbrushes to cans of oil for vehicles. Buy men’s and women’s jeans in popular sizes (size 44” to 60” for standard, fat-assed average Americans).

      If you think we’ll really be in an end-of-the-world (or nation) scenario, how about buying an extra generator you can sell you dufus neighbor? Water pump anybody.. or how about a mini-windmill to hang on the rooftop next to that dead satellite dish? By the way, don’t throw away that satellite dish. If things really get bad you can always use it over an open fire to cook a dead possum on.

      We may be leaving this deflationary period soon as the stimulus money runs out and with the price of oil rising inflation will hit soon enough. Seriously, if the shit DOES hit the fan, being prepared with a variety of products (stuff) to sell, barter or trade with will truly be helpful. And, if everything just muddles along… not to worry. You can always use that “stuff” yourself.

      Now where’d I put that old cast iron skillet and that case of refried beans? Damn! I’ve got to get organized!

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    5. Willie Wonka says:

      The only reason FDR was able to “confiscate” so much gold is because the majority of people believed in him.  People trusted the government much more then.  It is MUCH different this time around. There were many who did not turn in their gold then and this time you can bet most won’t.

      The only way items will be worth more than gold is  in a TEOTWAWKI event.  

      I advise everyone to read “Surviving the Economic Collapse” by Fernando Aguirre

      http://www.amazon.com/Modern-Survival-Manual-Surviving-Economic/dp/9870563457/ref=sr_1_1?ie=UTF8&s=books&qid=1271773723&sr=8-1

      He is an  Argentinian guy who lived thru their 2001 collapse. Bartering did not work and is most likely not viable unless we are thrown back to the stone age.  They still used Pesos even though they would fluctuate wildly, the currency did not go away.   Gold jewelry and small silver coins were the lifeblood of the economy during the crisis.  They  allowed people to trade for small amounts of Pesos when they were less  valuable , then when they changed to more valuable, often hours later,  they would rush out and spend the pesos getting more for their money.  The moral of his story, in a REAL WORLD event, currency will not go away, bartering does not work, and PM’s were invaluable, but in smallest denominations possible.

      Again, your best investment is Junk Silver.

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    6. Willie Wonka says:

      I forgot to add, I am not saying don’t  stock up on “goods”, weapons,ammo, etc, and neither does the author of the book I referenced BUT the PM’s will be valuable in all but the worst case scenario, and if that happens, it won’t matter if you “wasted” some money on the PM’s.

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