-- Posted Tuesday, 6 March 2007 | Digg This Article
by Howard S. Katz
3-5-07
“Volatility,” as used by the current economic establishment, is usually a euphemism for “decline.” But the word actually refers to sharp moves in either direction. And it was definitely volatility, in both senses, that we saw in the precious metals markets in the week of Feb. 26-Mar. 2, 2007.
However, out of all this pain there is definitely some good. And the message for those who lost money is that the way is open to make this money back and more besides.
First, what happened and what was the cause of the turmoil in many of the world’s markets in this fateful week? The cause was a speech given by Alan Greenspan to a select group of (very wealthy) financial people in Hong Kong on Monday.
There was no written copy of Greenspan’s speech, and attendees were not permitted to make tape recordings. But some of the attendees came out saying that Greenspan was predicting a recession. This caused a panic, and the Shanghai stock market fell 8.8%
As markets opened around the world on Tuesday morning, traders did not know why Shanghai had collapsed, but their motto was, “act first and think about it later,” or as the bumper sticker says, “just do it.” They figured that they would sell and find out why afterward. Markets around the world collapsed, and the DJI was down over 400 points.
Throughout the week the panic spread first to one market, then to another. One tip off was the value off the Japanese yen, which rallied sharply as big players, who had borrowed yen at near 0 interest rates for speculative purposes, unwound their trades. This was not Mr. and Mrs. Smith down the street covering their yen shorts.
Then on Friday we finally found out what had happened. Ed Andrews of the New York Times contacted some acquaintances of Greenspan who reported that he could not understand the world markets’ reaction to his words. Andrews wrote:
“When asked whether he expected a recession later this year, Mr. Greenspan said it was impossible to rule out the possibility but went on to say that most forecasters did not expect one.”
Edmund L. Andrews, “Ex-Fed Chief May Be Gone But
Not Forgotten,” NYT, 3-2-07, p. C-7.
I am well acquainted with Greenspan’s manner of speaking having attended several of his talks back in the 1960s (when his speaker’s fee was much lower). He is an intellectual and never gives “yes” or “no” answers when a highly qualified, “it is impossible to rule out the possibility” can be squeezed in. What Greenspan meant was, “most [competent] forecasters did not expect one,” in a word, no.
Note, it was in reaction to this kind of pseudo-intellectualism that Harry Truman made his famous call for a one-handed economist. I adopted this for the name of my newsletter as a commitment to subscribers to always state my position clearly, without hedging and without ifs and buts. For a more detailed examination of these events, see my weekly blog, WHO IS MANAGING YOUR MONEY? at www.thegoldbug.net, 3-5-07.
In conclusion, with no ifs and buts, the turmoil of Feb. 26-Mar. 2, 2007 was caused by thousands of fund managers who threw billions of dollars of stocks and commodities out the window because of something that Alan Greenspan did not say.
This is a sobering thought, but as I promised, there is a good side for us gold bugs. So if you lost money as March came in like a lion, then consider.
The commodity funds were buying gold (and silver and platinum) through most of Jan. and Feb. This is evident from the Commitment of Traders Report which shows a Large Speculator net position of +52,868 on Jan. 9 and of +142,092 on Feb. 27.
Some people are misled by the name “large speculator.” They have an old fashioned view that the large speculators are individuals with a lot of money. They figure that the large speculators are winners and the small speculators are losers. Thus, they assume that the large speculators are right and try to follow them.
But analysis of the gold market shows just the opposite. When COT net Large Speculators have had a relatively bullish position in gold, it has been near an intermediate term peak; when they have had a relatively bearish position, it has been near an intermediate bottom. For example, on 9-14-04 the Large Speculators were down to the relatively low position of +54,856, and gold was at $400. Two months later, on 11-23-04, Large Speculators were +138,632, and gold was $450. By Feb. 8, 2005, net Large Speculators were down to +9,175, and gold was back to $410.
By mid summer, net Large Speculators were still at the relatively low point of +49,022 (7-26-05); gold was a touch above $420 and about to take off. The funds kept buying on the way up until Oct. 11, 2005 when they hit +177,410 with gold at $470. At this point, they made a correct decision and sold into public demand, and their total contracts were lower (+133,936) by the May 9, 2006 high of $720.
Then they got back on the losing track again and had sold down to +56,050 shortly after the Oct. 3, 2006 bottom with gold about $580. At the early January bottom of $610, they were still only at +52,868, but they bought heavily through most of Jan. and Feb. and at the peak of Feb. 27 (gold at $685) they had a net position of +142.092. (This was one of the “short term bearish factors” which alerted me to a short term pullback on 2-23-07.) And if, as I suspect, they are now in a selling mode, this indicator could turn bullish in the near future.
A chart of gold over the past year shows a great deal of trading in the $600-$650 area. This is now support, and this good support should certainly hold, giving us an excellent buying opportunity.
This spectacle of the anxious, uncertain trader awed by the “expertise” of the man (fund manager) with a title is characteristic of our age. When I started trading, in the 1960s, most everyone made their own decisions. The 18th century was the Age of Reason, and the 21st century bids fair to become the Age of Dummies. We have books entitled, "YA-DA-DA for DUMMIES.” People dress their children in the hats of medieval fools. There is even a stock market advisor called “The Fools.” (And that is not my name for them; that is their name for themselves.) If I want a financial advisor, I want “The Wise Men” not “The Fools.” But then I am a hopeless square and totally out of touch with this age. (I turned bearish on stocks with the New Year.)
Watching the Large Speculator net position on the COT Report gives us a rough indication of when the commodity funds are bullish and when they are bearish. If their position is historically large, then they are not likely to do much further buying but are quite likely to trip over each other trying to get to the exit. If their position is historically small, it is a good bet that they will start to come back. This is a useful tool in our technical arsenal.
Experts can certainly help you in the financial markets. But to ascertain that a man is an expert, one must look at his record not his title. Can he do the job? The purpose of most titles is to trick you (in the same manner as the magician’s slight of hand) and keep you from looking at the record. The spectacle of end-Feb., early March 2007 with the money of gullible traders being thrown out the window by “experts” based upon something that never even happened, that is a mark of our age. If you want to succeed in these markets, know what you are doing; take your advice from the expert with a record and do not listen to the “expert” with a title.
And buy the blazes out of the gold market circa $650.
Howard S. Katz was one of the early gold bugs of the late ‘60s and ‘70s, turning bullish on gold in 1965. His favorite gold stock, Lake Shore Mines, went from $3/share to $39/share over the course of the seventies (sold at $31). Katz turned increasingly skeptical about gold as it mounted its final rise in 1979, and he called the top after the close on Jan. 21, 1980 (with gold at $825.50/oz.). Katz traded gold in and out during the ‘80s and ‘90s and once again turned long term bullish in Dec. 2002. His thoughts on commodities, stocks, bonds and real estate are available in a letter entitled The One-handed Economist and published every two weeks giving specific advice on trades in stocks and futures. This letter is available (both electronic and paper copy) for $300/year with a 3-month trial for $100. Send to: The One-handed Economist, 614 Nashua St. #122, Milford, N.H. 03055. (Include both electronic and mailing address.) Mr. Katz’s blog is available weekly (no charge) at www.thegoldbug.net.
-- Posted Tuesday, 6 March 2007 | Digg This Article
