BUY POINT ON WAY TO $1,255 GOLD
Ned W. Schmidt, CFA, CEBS
As we write, Gold is preparing to enter the fourth year of a bull market. The official start of this Gold bull market was 20 July 1999 with a London closing of about US$252. We expect all Gold devotees to mark that date with adequate merriment, gracious excitement and reverent appreciation for the grand opportunity that lies ahead. The rewards for Gold's ascension to $1,255 will be worth the patience that has been demonstrated.
Our GIANT MOMENTUM MODEL is shown in the nearest graph.(See note at end.) This indicator gave a Buy signal on 26 June 2001 at a price of US$269.50. The construction of this indicator normally lags the market and is consistent with market action from the bear market low of 1999. Gold's price had only risen about $17 from the low to the Buy signal, but has risen $42 from the Buy signal.
The value of the GIANT MOMENTUM MODEL is that it tells us to change our thinking. That indicator combined with the length of time since the Bear market low suggests a serious need to insure that we have a proper attitude toward today's Gold market. Some doubts are fine as we do expect more reflective thinking on the part of Gold investors. BUT, Gold is in a Bull market and we need to be thinking like Bulls.
Time has arrived when we need to be thinking about tactics for a Bull market. Investors should be positioning their portfolios for the coming rise to $1,255 or better. Let the gurus on CNBC be bearish on Gold, as they have been wrong and will be wrong. Bulls are on the right side of this market, so let us use Bull market tactics.
Remember all the forces that are on your side as we implement Bull market tactics. The Federal Reserve is on your side, printing money and creating a North American Housing Bubble. Economic fundamentals are on your side with the U.S. current account deficit moving toward a terminal level. The Pan Eurasian Islamic War is on your side. Governments are on your side as they conspire to hold the price of Gold down. Remember that all government actions on Gold are like a nation attempting to protect its currency while having horrible economic fundamentals. Devaluation is always the result. The same will be true for the dollar, and Gold will rise as a result.
Remember the conspiracy of silence on the part of Bay and Wall Street and CNBC. They are trying to keep investors focused on paper assets, despite the mounting losses. They do not report adequately on the positive developments for Gold. They do not report on the long standing Silver shortage. And the reasons are simple. Gold does not buy advertisements or do IPO's. The analysts and producers and reporters must still own the technology stocks.
With that tirade out of our system let us return to our Bull market thinking. One fundamental rule should be permeating our thinking during a Bull market. We are looking for times to buy. We are looking for entry points for the market. We want to go long the market. We are NOT looking for sell points.
Our thinking is the reverse of what is appropriate for U.S. equity markets. In those markets we are looking for opportunities to get our money out, not in. So many investors are making a critical error. U.S. equity markets are in a bear market, and they are still looking for things or times to buy. One should be only looking for times to sell so one can move capital out of a bear market, U.S. paper assets, and into a bull market, Gold. Those that make these moves successfully will retain their wealth. Those that do not will be mauled by the Mother Bear, perhaps the meanest of critters on Earth, but they will be far wiser in later years.(Most Gold investors have learned from their past experiences.)
Let us get back to the Gold Bull market. Life would be so simple if we all had our entire portfolio in cash the day a Bull market starts, and someone in fact did ring a bell. That however is never the case. Such is the reason we are looking for buy points or good entry points in order to make additions to our portfolio.
We have come across a simple tool for aiding in the identification of these buy or entry points. We use a longer term moving average of our modified daily stochastic.(See note on stochastics below.) This indicator helps, one, to highlight times when the price has retreated to perhaps the lower end of the channel and, two, a time when the price has declined. Remember that our goal is to buy low and sell high, the reverse of growth stock investing. And thirdly it helps identify points when buying is likely to be more timely.
Such indicators also act as a restraint on our emotions. Some have a near emotional breakdown if they do not buy when something is running, or the "I've missed it" attitude or the "it's going higher, now" panic attack. Part of this is the bad trading habits many developed during the technology stock bubble when so many bought off the new high list. Remember, the goal is NOT to buy at the high.
The second graph shows the buy points identified by this indicator for the past year. Only four buy signals were given. That number is probably close to the right amount. More signals would be more than most investors can use effectively. Also, more signals could move us toward "day trading," a fundamentally bad idea for most investors.
Since the GIANT MOMENTUM INDICATOR is positive, we are only looking for buy signals or entry points. As can be observed in the graph these signals seem to be useful. Certainly, they are more useful than the record on Gold of most investment gurus in the popular media.
The motivation for this writing is the signal being given at the present time(5 July 2002). A Buy signal has developed as a result of the recent retracement in the market. We suspect that many indicators will improve during the coming weeks and a much improved Gold market is likely. A move above the previous high is extremely likely during July.
Why is this signal developing now? Of course many would like the answer to that question. We seem to want to know a "why" when all we really need to know is what the price is doing. The why is the price, but perhaps some reasons due exist for this signal. Possible "why's" relate to the end of the quarter.
One, those that were short or hedged might have needed to reduce this exposure prior to closing their books for their quarter and producing financial statements for the period. Most would have likely preferred to show a reduced short or hedged positions as they were wrong. That motivation would have increased buying up to the end of the quarter.
Second, the end of the quarters gave some funds an opportunity to book profits. Now "funds" is a name given to a mysterious group of people that no one can identify. Anyway, if you ran a fund that was long Gold you have a nice profit. Booking the gain will do more to insure you receive your performance fee. These funds would have sold after the end of the quarter causing downward pressure on price.
Other possibilities include that the market simply needed to rest, or that some might foolishly think the break down in the equity markets to new lows offers a better opportunity. For whatever the reasons the Gold market is over sold and is creating a buy/entry opportunity. Regardless of the reasons or the "why's", the Gold market looks attractive. With fair value approximately US$500 and the long-term target about US$1,255, investors should be using these over sold points for creating new positions or adding to existing positions.
Notes on GIANT MOMENTUM MODEL:
This indicator was created in about 1987. The decision rules are simple but are what really seem to make it effective. Used are the momentum, derivatives, of several geometric moving averages. When the momentum measures move to all positive at plus four, a buy signal is given. When the indicator moves from positive to all negative at minus four, a sell signal is given. This indicator lags the market and it kind of serve as a wake up call that all is positive or negative. While not flawless I have generally been wrong whenever I have argued with it.
Notes on Stochastics:
Stochastics are probably one of the best tools for investors. Most often used by traders this oscillator can add discipline to an investor's actions. This measure is available with most decent analytical programs. Investors should use this oscillator in a common sense manner. When more likely to give a sell signal, do not buy. That simple rule will help improve the price at which you take positions. Also important is that you run it on the cash price of Gold, not the futures price or some other measure. Gold stocks and futures derive their value from Gold's price. Make decisions on buying Gold stocks, etc. from what Gold is doing not from some derivative security.
Notes on 5 Year Moving Average:
In the chart for the GIANT MOMENT MODEL is a five-year moving average. As we all know, moving averages are not magical though this one provides some interesting insights. The price of Gold is above the 5-year moving average. That means that on average positions created in the past five years are profitable. Investor money is drawn to profits. Second, that relative position means that shorts or hedges created in the past five years are, on average, unprofitable. That condition suggests they are more likely to be closed out, creating additional buying pressure. More important is this set of conditions reduces the incentive for producers to do excessive hedging. Government sales may also be dampened by this condition as past sales look increasingly like mistakes.
And in closing, a set of profitability conditions has been created in the Gold market that is more likely to draw money to the long side. That is all good, and will help in the move to $1,255 Gold.
Ned W. Schmidt, CFA, CEBS
nwschmidt@earthlink.net
Ned W. Schmidt,CFA,CEBS publishes THE VALUE VIEW GOLD REPORT, a monthly review of the developing Gold Super Cycle. His major report, "$1,245 GOLD", 150+ pages with 70 charts and graphs, is essential reading for investors wanting to understand the coming Gold Super Cycle. This report is rapidly becoming a best seller among both those new to the Gold market and those that simply need their faith renewed.
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