Dow/Gold Cycle SimplifiedLooking for a tool to predict future POG movements ? A tool which is extremely easy to use ? A tool which has proven to be extremely useful in the past ? A tool well respected by many veteran market analysts ?
If interested, just follow !
After publishing my essay "2003 - Year of the Junior Exploration Companies" I received many e-mails from people seeking advise regarding investment possibilities in the junior exploration sector. The article was appreciated well and I would like to thank all of you who've send their compliments my way !
As you could read in the previous essay the case regarding the investment of the century was build on an assumption of a solid POG ascending to 400 US$ ! I summarized plenty of critical drivers which all pointed towards higher prices for Gold. For the sake of this essay, we call this summary the Fundamentals Of The Gold Market !
So we've learned that the fundamentals regarding the gold market are extremely strong !
Does that mean higher gold prices automatically Answer = No !
Investors should be aware that markets are not going up because fundamentals tell they should do ! Markets will turnaround because of change in investors sentiment !
So beside the fundamental analyses you should be focused on a change of sentiment. How ? Good question, what do I know ? The only thing I can do is try to find people who do know !
Easy isn't it ? Just find an expert and there you go ! But who is the expert ? Alan Greenspan ? George Soros ? Warren Buffet ? CNBC special guests ? The Pension Funds ? The mainstream analyst ? So many experts, so many opinions ! So the question remains, what should I do ?
Here we go !
Do I listen to the forecasts for 2003 of the mainstream analysts ? No ! Why not ? Because I think they're completely worthless. Well, pretty hard conclusion for a non-expert isn't it ?
Please let me explain why !
It's not the expertise of the main stream analyst which I doubt but it's the proven impossibility of making short term predictions which makes me a little nervous ! Compare it with a weather forecaster, how many times they are dead-wrong in their one-week weather forecasts ? Although these weather forecasters are well educated and having access to the best weather simulation software packages, still they do not manage to make a credible weather forecast for a whole week ! This analogy with the stock market is really quite astonishing. The market analysts are proving themselves to be completely clue-less when it comes to short-term predictions. They're missing their targets most of the time by great margin ! Believe it or not, just random buy and sell over the last three years would top the mainstream analyst.
You don't believe me ? Well, read on !
I was happy to see an article published in the Dutch Financial Telegraph that Gorilla Jacko from Berlin has beaten the AEX index (Amsterdam) for the third year in succession.
Here's the link (sorry only in Dutch !)
Jacko has beaten the AEX index this year by more than 15 %. Since January 2000 Jackie even performed better, he has beaten the AEX index by more than 44%.
You think this all was unnoticed by the main stream investor ? You'd bet it didn't. Guess what ? There is a website dedicated to this Gorilla (www.beursgorilla.nl) which counts already more than 20.000 subscribers.
Why do I come up with this comical example ?
Because I think it proves two important things !
First : Making reliable short term stock market predictions (1 year) is statistically seen not possible.
Second : Mainstream investor investment strategies are merely based on greed and fear. This example shows perfectly that mainstream investors don't care about fundamentals at all, all they care is profit ! If a Gorilla can do a better job as the mainstream analyst year after year, mainstream investors will just follow. Of course the Gorilla's investment decisions have no fundamental background at all, he just picks bananas which are labeled with fund names !
So if making short term predictions is so difficult that even the best educated analysts can't do it , how can I as a modest investor implement a successful investment strategy (short term) ?
Well , to be honest, I can't simply because (as described above) the stock markets behave more or less randomly in short term , (analysts beaten by a Gorilla proves this thesis) . Why should I pretend to know better ? No, as far as my investment decisions are concerned, I don't even listen to the main stream analysts !
So what do I do ? Well, if we go back to our weather forecaster who isn't able (like the analyst) to make a reliable weather forecast for one week despite his advanced skills and programming tools, he is definitely able to make a long term weather forecast ! That's easy ! Everybody blessed with a functioning long term memory will be able to predict the weather 6 month ahead. (The ONLY thing in which I'm interested in is the TREND of the temperature change over 6 month, NOT the daily up and downs which I just consider to be as NOISE !)
When summer nears its end, everyone "knows" that temperatures will go down when heading into winter. Why do we know ? Because the weather cycles are burned in our memory !
Although the weather forecaster can't predict exactly when the hottest day of the year will occur despite his advanced skills and programming tools, you just know that the end (of summer) is near when the days are shortening again ! Although the fundamentals tell us that after the longest day temperatures will soon go down because of less sun hours every day, so less energy inflow, so less heating up of the atmosphere, it is still very well possible that the hottest day will occur one month after the longest day or perhaps even two month after the longest day, but eventually, temperatures will go down !
Easy isn't it ? Of course it's easy to understand because the weather changes are fully captured in short cycles of only just one year . In summer it's hot, in winter it's cold ! Period ! The human brain is very well capable of analyzing short cycles waves of just one year. But if we look at the extreme short cycles waves of electrons circling around the nucleus of an atom, do you have a clue how long it takes ? Well, I certainly don't ! Or take a look at extreme long cycle waves such as Jupiter orbiting the sun ! How many years ? 10 ? 12 ? Who knows ! Or what about the longest cycle wave of all, the expansion / contraction cycle of the universe ! According to Stephen Hawkings (worlds most famous scientist) the universe is in expansion mode but will eventually contract again (Stephen Hawkings : A Brief History of Time ). This will eventually lead to the end of the universe as we know it, but fortunately investors don't have to be worried because Mr. Hawkings estimates that it will take another 15 billion years before that to happen !
What is my point telling about these cycle waves ?
Well, simple ! Everything in this universe, everything on earth, everything in life just happens to be taken place in cycles ! Day/Night, Birth/Death, Summer/Winter , as you can imagine, this list is an eternal one ! But more important, did you ever ask your self if the stock market was subject to cycles as well ? My guess was yes, but as a non financial expert I had to verify my thoughts ! So what was I looking for ? You may guess, a stock market analyst with a LONG-TERM STOCK MARKET MEMORY ! A memory which covers at least a few bear and bull markets ! Hello Mr. Russell , where are you ? Stock Market cycles can only be understood if you study the stock market history thoroughly ! You will discover that stock market cycles present themselves in multiples of decades and therefore almost impossible for the human mind to recognize ! Indeed, Mr. Russell
( www.dowtheoryletters.com) is one of those famous stock market analysts who at the age of 76 understands these market cycles very well and warns investors for things to come based on experience from the past. And that's exactly the big difference between the average market analyst and old-time stock market gurus who tend to think in cycles. I'd bet you heard lots of positive spin regarding the stock market next year from the mainstream analyst. Spin such as ; economic recovery is on the way, a 4 year bear market has never happened before, and so on !
How different the approach of the cycle-analyst ! Their reasoning goes something like :
- History dictates that a bull market will be followed by a bear market !
- The bigger the bubble, the deeper the bust !
- The longer the bull market, the longer the bear market !
So a cycle analyst will never predict a start of a new bull run in equities with P/E's still far above typical bear market bottoms (which is still the case today) . The cycle analyst patiently waits for extreme undervaluation of stocks, P/E's in the 6 - 8 range, extreme pessimism, lots of 90% down days in a short period of time etc..Why ? Simple ! Because history told him to do so !
Needless to say that none of these criteria mentioned above have been met so far !
(Although the example given here is extremely simplified, I just wanted to highlight the difference in approach among the analysts)
When I made my first Gold investments in 1998 I really didn't know anything about bear/bull market cycles. I didn't invest in equities because I didn't feel comfortable with the fundamentals at that time such as ; extremely high PE ratios , advance/decline ratio slowly reversing, extreme optimism, all things which history pointed to as being bull market top indicators. So I decided to look for alternatives, I was looking indeed for a sector which was undervalued and blessed with good fundamentals. I found it ! It was the Gold Market ! Gold mining shares priced at a 15 year low, Frank Veneroso just published his GoldBook Annual which showed the 8000 tonne short positions in Gold at that time, supply/demand deficit , well, what else could I wish ? I was happy to invest in the Gold market, the fundamentals where on my side, so what could go wrong ?
As I said before, markets don't turn around because the fundamentals tell they should do ! I found out myself the hard way ! I entered the Gold Market way too early.
The markets are driven by sentiment, by greed and fear ! We saw that investors are even willing to take advise from a Gorilla , typical example of greed !
So what about the gold market ? Greed certainly can't ignite a bull market ! Why not ? Well, as shown above, investors don't give a damn about fundamentals, they only care about profits !
Due to the fact that mainstream investors do not think in long-term cycles, they will only see the bad performance of the gold sector over the past couple of years (prior to 2001). Greed comes into play at a later stage !
So fear should do the trick ! And that's exactly what is happening right now ! Fear for war, fear for monetary chaos (dollar crash) !
Here's a quote from President/CEO Nick Ferris of Jinpangu Gold who knows the Middle East / Asian markets very well to GATA chairman Bill Murphy :
"We are witnessing a devaluation of the Dollar against the world's ultimate currency - gold. It is an event that is largely being driven by the fears of the Asian investor."
"We have all the necessary incendiary material for an sudden and massive devaluation of the Dollar against gold; a huge short position, a widening supply deficit, the announcement of the Federal Reserve's intent to mass monetize America's bad debts and the threat of two major land wars in Asia. The catalyst is the Asian investor. It appears that the fuse is now lit."
The fuse has been lit, the fundamentals will guarantee a nice follow up !
The multi-year suppression of the POG will backfire (mother of all short squeezes ?).
Hello JP Morgan ! Just saw your press release denying JP Morgan has any exposure to Gold ! Sure, how could investors be so stupid to think JP Morgan is in the Gold business ! You asked for an investigation by the SEC regarding those gold trading rumors ? So Blanchard & Co must have been misinformed as well ? Hello Central Banks ! Aren't you missing something in the vaults of your banks ? Heard that half of your precious gold is gone (15,000 tonnes) . Also rumors ? Ah, I see, gold swaps may still be reported as an asset according to the new IMF guidelines ? So I can be relaxed now because you may still report your gold assets as being real ? Very clever these people from the IMF ! Well well, I sure do feel a lot better now ! But if you don't mind I'll stick to my Gold Investments !
A lot of talk about cycles, so let us finally have a look at one !
The graph below shows my favorite cycle wave , the one which represents the Dow/Gold ratio !
As you can see, during the past century three bottoms occurred, all bottoming out in the 1 - 5 range. The latest cycle topped out in 2000 at just above 40 and is heading down now.
Currently the Dow/Gold ratio stands at around 24 ! This is extremely important, a decline from over 40 to 24 CANNOT , I repeat CANNOT be attributed to just noise, so it HAS to be fundamental ! The Dow/Gold ratio is heading towards the 1 - 5 area ! Where it will bottom I don't know, to be honest I don't really care ! The exact timing/prediction of the bottom will be as difficult to predict the minimum temperature of an upcoming winter. As I said before, When summer nears it's end, you'll know for sure that temperatures will come down, you will probably know in which time frame the lowest temperature will occur, but no exact timing nor an exact minimum can be given.
Same situation with the Dow/Gold cycle, you know that the Dow/Gold ratio is going down. But when and at which level it will bottom you simply don't know ! What you DO KNOW is that is will take a long time (multi-year time frame) and the bottom will be somewhere near the 1 - 5 range ! So you DO KNOW that the POG will go a lot higher than it is today before nearing the bottom of the Dow/Gold cycle.
Of course during the descend of the DOW/GOLD ratio there can be little NOISE ! So indeed I expect every now and then some setbacks, but that's all in the game. It's the TREND which is important to me , not the NOISE !
I was happy to see that Richard Russell mentioned at the New Orleans Investment Conference in November 2002 that he expects the Dow/Gold ratio to reach parity (1:1) again at a level of 3,000 ! Yes, Dow 3000, Gold $3,000.
New Orleans Investment Conference
Russell expects the price of Gold, now at $320 an ounce, to equal or exceed the nominal level of the Dow Average, now at 8770 at some point.
"Gold will cross $3,000 an ounce, with the Dow 3,000 or lower", Russell said
You get it ? I don't care if the Dow goes to 5000 4000 3000 or whatever, I don't care if Gold will skyrocket to $1,000 $2,000, $3,000 or whatever, what I do care is that I'm convinced that we are in a multi year bull market in Gold and that the POG will go a lot higher than it is today and that's
why I'm convinced that a once in a lifetime opportunity is upon us when it comes to make legendary profits.
I know investors who argue that you can't predict future based on historical events !
Well, investors thinking that way, good luck with your investment strategies but be careful not to be beaten by a Gorilla ! Hope you don't mind I'll stick with my investment strategy, following those market analysts with a LONG TERM STOCK MARKET MEMORY, people such as Richard Russell !
Winston Churchill said it all :
The only thing we learn from history is that we don't learn from history !
As I said before, many veteran market analysts such as Richard Russel (www.dowtheoryletters.com) and John Hattaway (Tocqueville Gold Fund - www.tocquevillefunds.com/gold/) often refer to this cycle.
Hope you will do the same !
All the best,
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