Look For Familiar Patterns In Stocks and Commodities

The road map for how the dollar is trading was actually created back in 2008.  If you look at the chart I have put below, you can see how similar the patterns are at this point.  I have divided the chart into sections that correspond with the dollar cycles.

Stocks do not necessarily trade opposite of the dollar, bu tthey tend to trend with it.  The chart below shows 2008 S&P in an unmistakable pattern that follows with the 2008 dollar.  Barring any significant news such as Bernanke changing fed policy, I would not bet against something similar playing out.

And commodities should work the same way.  Sorry Dennis, but this corn chart is why fertilizer will come down, and so will MOS.

Mosaic got smoked back in 2008.

QE Post #2

Back on April 24, I posted a compelling chart which graphically showed how various asset classes behaved with Quantitative Easing Programs.  Again today, I wanted to re-visit what has happened since that post.   Things have basically played out as I described.  I would say moving forward that these trends will stay in tact until we hear of further interference by the fed.  Until then, expect further deflation on all asset classes, and further increases in the value of the dollar and debt instruments (treasuries).

Occupy Wall Street Video Going Viral

Making Money Buying At Tops

Most of us probably have the feeling we always buy at tops, especially over the last 10 years.  Remember how back in the good old days you could buy practically any stock and it would go up?  That was back in the days when “buy and hold” was en vogue.  That is what buying in a bull market does.  A rising tide lifts all boats as they say.

Lets look at a guy who has bought at the tops over the last 10 years.  He invested $10,000 on 4 different occasions, but each time he bought at the very peak of the market.  You would think he would not have much money left.

Alright.  Now we are in the present day.  How much money do you suppose this guy has?  By my calculations, his investments are now worth $94,530.  Yes, despite buying at the tops, he has more than doubled his initial investment.

Of course, what he invested in was gold.  This post is not so much about buying gold as it is about riding the bull.

We are just out of another one of these bull tops and have a good opportunity to get back into gold at a much better price than where we sold.  I was hoping for an even better price at the end of a D-Wave, but we may never again get to buy a D-Wave bottom.  What we have is an opportunity to buy at an intermediate term bottom, which comes along about every 15 to 25 weeks.

This is the importance of knowing the kind of market you are in.  If you are buying most any stock but Apple, you are trying to make money in a bear market which is very hard to do.  I know our portfolio has some duds, but so do the best portfolio managers in the world.  Legends were made back in the 80′s and 90′s in the investment world, but only the investment banks have figured out how to do it in the last 10 years, mostly with the help of your money.  The only bull market I know of today is in the commodities market, and the commodities that will shine the brightest are the precious metals.

A Coil Forming On Gold

As the name implies, any stock or commodity can go through a coiling or compression process.   Just as a coil or spring will do when you pull it to tight, eventually they explode.  Given the levels of interest by large speculators and commercial traders on buying this large dip in gold, I would speculate that gold is going to rocket higher.

As I have explained before, Gold Miners are undervalued relative to gold.  Over the last three years, they have not enjoyed the gains that gold or silver has had.  I expect they will outperform over the next year.  Right now, the gold mining ETF GDX is near the bottom of this megaphone or broadening wedge pattern.

No D-Wave

As I was saying over the weekend, I reserve the right to change my mind when the facts change.  Gold has not yet fallen enough to satisfy the requirements of a D-Wave, and I doubt they do.   I am willing to call this a strong pull back into an intermediate cycle low, which is still good……just not as good.  Similar conditions existed back in July when I strongly recommended we buy gold.   The C-Wave lives on, and those who buy gold here will be happy later that they did.

We needed gold to take one more leg lower to satisfy the requirements of a D-Wave, but the large spec funds and commercials have caught gold at 1600 and are not allowing it to fall any further.  I said over the weekend that the commitment of traders report looked very strong.  Gold has now spent 9 trading days teasing 1600 but not falling below during normal trading hours.  Gold never even touched the 200 dma.

Meanwhile, stocks are ripping out of an intermediate bottom.  I think stocks could get back as high as the 200 dma.  The dollar is due for a pull back.  I think it is time to get back onto the gold train as it is leaving the station again.

Now, I am going to put a wrinkle into what I am saying.  You ladies like buying things that are beaten up.  In the pm arena, there is nothing beaten up more than mining stocks by far.   The price of mining stocks relative to the price of gold is the lowest it has been in three years.  That means the potential move in the miners will be much larger than the metal.

Mining stocks are the most oversold that they have been since back in 2008.

If things have not changed much in the next week, I am going to recommend we get back long into the precious metals, but this time with mining stocks.

What Can Gold Traders Learn From Tulips?

Financial bubbles are a strange phenomena.  They occur all the time, and the story is always the same.  You never know you are in a bubble until after it pops.  Even during the dot com bubble, everybody thought they could get out before the bubble collapsed, but few did.  The financial services I was getting my advice from at the time were putting the petal to the metal making recommendations to remain long in the market, and those were conservative newsletters.  It was after that that I truly began my investor education to better understand how financial markets really work.

Since the late 90′s, we have had some of the largest financial bubbles ever in history.  The housing bubble, the private debt bubble, the dollar bubble, the dot com bubble, and now the dot gov bubble.  Bubbles are not at all new, and the mechanics of them are all similar.  One of the worst of all time was actually the Tulip Mania of the 1630′s.

In 1634, you could buy a tulip for .20 cents.  In 3 years time, tulips had gone up to 60 florens (dollars).  At the peak of tulip mania in February 1637, some single tulip bulbs sold for more than 10 times the annual income of a skilled craftsman.  By late 1637, you could buy all the tulips you wanted for .02 cents.

I am sure had there been a fed back in the day, they could have printed enough money to keep this valuable venture going just like we are doing today.  What a wise thing that would have been.  Fast forward to modern day, we are keeping Bernanke as busy as a one legged man in an ass kicking contest.   Once you get 3, 4, 5 or more bubbles all going at the same time, things can get out of control in a hurry.

Asset bubbles all usually work the same way if left alone and not interfered with.  Dr. Jean-Paul Rodrigue of Hofstra University in New York has studied bubbles going back 500 years.  Each time, the situation is different, but there are always similarities as well.  He has divided financial bubbles into 4 distinct stages:

1.  Stealth – Insiders and institutional investors begin accumulating.  The general population is unaware.

2.  Awareness – Retail investors begin to recognize the appreciation.   Sell offs are met by smart money buying dips.

You get a sell off at the end of this phase.  It is a bear trap as people fooled into thinking it is over panic sell and smart money is more than happy to buy.

3.  Mania – Everybody is jumping in for the “investment of a lifetime”.  I know you have heard me use that term recently, but you probably have not heard anybody else using it.  I mean during the mania, you will hear everybody talking about it.

4.  Blow Off Phase – The moment when everyone recognizes at about the same time that they are about to get left holding the bag.

So, where do you suppose we are today with gold?  Do you hear everybody talking about buying it?  Hell, I don’t hear Patrick talking about it and he is a jeweler.   Nobody in my family talks about it but me.  I do believe everybody is aware of it though.   Some folks are nibbling on it, but nothing like what is about to happen.

I happen to believe that we are now in the bear trap stage.  I think we are about to enter the stage where money floods into gold to help preserve value because they cannot find a safe place elsewhere to put it.  People are sick of the stock market.  Housing is a mess.  Once inflation on the street picks up, more people are going to discover gold.  The price escalation will be spotted by the media, who will then get all the gold bulls back in front of the cameras and get everybody excited again about the gold market.  The mania phase will now be in full swing.

This chart shows the above chart applied over the current gold market, and the NASDAQ bubble of 2000.

This sucka has several years ahead of it to run.  If we buy gold, silver, or mining stocks, I am sure the decision to exit the trade could get quite intense.   That is part of what makes being a member of the BLIC so much fun though.

I will leave you with this silver chart.  See anything that looks familiar?