An Optimist Gets No Respect

With all due attribution to Rodney Dangerfield, I have to tell you than as an Optimist, I get no respect. For example, no one phones to thank me for setting the stage to profit from this most recent bullish move in silver and gold. I called for caution in December 2006 when gold was up to $650 and silver was above $14 and near its highs, but its hard to get respect from precious metals bulls when saying something that doesn’t sound bullish. I tried to make it clear in my July 2007 commentary that with gold at $660, silver at $13, and both seeming to drift to nowhere, that was a great time to be accumulating a full position in the metals. Maybe that recommendation got no respect because I quickly added to not plunge into buying all at once, but to add a little at a time over the following weeks. That approach left me with good buying power a few weeks later to pick up more gold near $650 and more silver at less than $12, but I still got no respect.

Now here we are with a 50% gain in gold and more than a 60% gain in silver since my commentary eight months ago, and my respect phone still does not ring! I confessed to some people that I plan to take some profits soon, a little each day or two for perhaps the next few weeks, but they told me I don’t know what I’m doing because they say gold and silver will go straight up to $1,200 and $25 without a pause. They may be right, and I’ll respect them either way, but I am reminded of the Wall Street saying, “Bulls make money, and bears make money, but pigs get slaughtered.” My approach to take a few percent of profits, at several times and too early in a move, makes sure that I will have buying power left when an inevitable correction appears. But that old fashioned idea of taking some profits during a move is out of fashion with the top and bottom calling technical analysis contingent, and I’m sure that I will get no respect for that either.

A little more than a year ago, I asked if silver could one day cost more than gold, but my respect-o-meter dropped way negative for that. Sure enough, gold significantly outpaced silver for the following ten months, and the silver to gold ratio dropped to the bottom of its channel, until two months ago when silver began to catch up. Even the markets gave me no respect! I don’t feel too bad about that lack of respect because silver hasn’t yet begun to strut its stuff. As I indicated in September 2005, I didn’t expect silver to explode until base metal production was significantly reduced, because two thirds of silver production is a byproduct of base metals mining. As you can see in the charts of copper below, base metal production continues to increase with increasing base metal prices. To ignite the silver rocket, base metal inventories need to rise further to depress base metal mining. My guess is that silver will repeat its previous history of outpacing gold soon after the increasingly severe recession chokes the base metals warehouses with increased inventory and constricts base metal production, which results in sharply reducing the production of byproduct silver at a faster rate than silver consumption is reduced.

Copper inventories

Copper world production

No respect for a not too bearish view on stocks and houses

My respect phone has also been noticeably silent about my June 2005 view on the prices of stocks and houses. While I agreed that stocks and houses were significantly overpriced, I argued that it might not be profitable to bet against either. Some bears who have shorted the stock markets will tell you that they wished they had followed my guidance instead. It is exceptionally difficult to make profits by betting against a stock market that is not permitted to fall in price. Admittedly, my comparable statements about the Fed finding ways to support housing prices look a little shaky, but the opera isn’t over until the large lady sings. My continuing guess is that the Fed will create a way to prevent an avalanche of plummeting house prices that would decimate the U.S. economy. No, I am not advocating the purchase of residential real estate now that prices have dropped a little. If there was a way to sell short on the prices of existing real estate, however, I wouldn’t recommend that approach either. My guess is that the Fed will orchestrate a way to minimize additional real estate price declines while they proceed to inflate the economy at a maximum pace. Eventually, the rising tide of the inflation process will lift all the real estate and stock “boats” high enough that their prices will no longer need support to keep from falling. My view is that those who wish to bet against stocks and houses would do better by increasing their bullish bets on silver and gold instead.

The Optimist’s charts don’t merit much respect, either

Even I must admit that my Optimist charts are not nearly as complicated as those usually highlighted in the articles we read. My charts don’t show the support and resistance bands that always contain the market action, except of course when the action goes outside those bands. Neither do my charts have all the convoluted technical indicators or patterns that always identify exactly when to buy or sell, except of course when they add sufficient confusion that they induce analysis paralysis. My charts well deserve the lack of respect they are accorded. For what it is worth, however, my charts do show the channel lines that I draw to help me to put the market action into a perspective that is helpful to me, and they show the big picture as well as the recent activity. As an example of how my charts work for me, consider the long term charts of silver and gold which are updated through 3/06/08 and attached below. I see that both silver and gold are very close to the top border of an expanding channel that I called a cornucopia. I will admit that in the past there were a few (thousands, actually, but at least that is less than millions!) times when markets pretended that they did not know about the predictive powers of lines drawn on charts by the Optimist. I must caution all readers that this could be yet another opportunity for the markets to teach me a little humility by once again blasting through my trend lines. Readers should consider this information to be only an optimistic guess, and should be cautious about applying any of it to their own finances. For me, however, I am satisfied with better than 50% gains over the last eight months, and I am happy to have the opportunity to capture a small percentage of those gains to use for buying future price dips. I update my charts each Friday evening. Readers are invited to view when they like. Hopefully the charts will be helpful to some. No respect is required to take a look! Cheers!

Silver monthly through 3/06/08

Gold monthly through 3/06/08

Bonus Q & A

Q) So you think this bull run in gold and silver is over, and you are selling out? You need sympathy, not respect! Would you be interested in buying some cattle grazing land a few miles west of California?

A) No! That is not at all what I said. I don’t even get any respect about being able to say what I mean! I don’t know when gold and silver will peak, but I’m confident we aren’t near there yet. My bet is that the final highs will be much higher than most people expect. I only said I am taking a few profits off the table now, and planning to buy back into a future correction. The most that I am willing to sell is 25% of my maximum position. The remaining 75% is a core investment that I do not intend to sell until the Fed raises interest rates to higher than real inflation, which they will not do because this time it really is different. I gave up long ago on trying to time market tops or bottoms. Nobody, including me, has any respect for my skills at calling tops and bottoms!

Readers are invited to add their questions and answers in the forum. Cheers!

* * * Notice * * *

This commentary presents only the viewpoints of the Optimist, and it is intended only for perspective and entertainment. Please do not interpret any portion of this work as investment advice. If any of the concepts discussed here appeal to you, then you must do the work to decide if and when and how you should invest. The Optimist does not ask for any profits you make, and he cannot be liable for any losses incurred as a result of your investment decisions. The Optimist wishes you the best of luck in whatever you decide to do or not to do.


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