-- Posted Tuesday, 23 September 2008 | Digg This Article
| Source: GoldSeek.com
by Howard S. Katz
9-22-08
On Wednesday, Sept. 17, 2008, the price of gold rose by $70. W will look back on this day as an important signal for the big move in gold (and other commodities) to come over the fall and winter.
First, the decline in gold over July and August was not caused by central bank manipulation of the dollar. Even central banks do not have enough money for that. The Fed statement H.4.1 reports on its holdings of (US) securities for foreign central banks. It is true that this number has been increasing, but a closer look at the number refutes the theory of manipulation. The increase in foreign holdings for 2008 was concentrated in the first and second quarters. But in the 1st quarter, the dollar declined, and in the second quarter it stabilized. In the 3rd quarter, when the dollar rallied sharply, the increase in foreign holdings was much lower. Since the 3rd quarter is not quite over, we must adjust the number by multiplying by 6/5. When we do this, we get not quite 90 billion dollars (expected 3rd quarter result).
The increase in the 1st quarter was $128 billion, and this could not prevent the dollar from declining. So it does not seem reasonable that a $90 billion increase in the 3rd quarter could have caused a large rally. The foreign exchange markets trade trillions of dollars per day. It is not likely that they can be manipulated with less than $100 billion spread over a 3 month period. (A more detailed analysis of this can be found in the 9-19-08 issue of the One-handed Economist.
In August 1982, there was a powerful stock market rally. Dr. Doom, who was being touted as the best economist in the country, made a small retraction of his bearish position. In 3 weeks the DJI and S&P were up by 20%, and in 12 weeks they were up by 40%. That strong rally, on what was a minor news item, was the tip-off that stocks were starting a giant bull run. The $70 one-day rally last week plays the same role for gold.
Second, why did gold (and commodities) decline and the dollar rally in July-August? The explanation that makes the most sense is that most commodities had simply gotten “too high.” This is a common event in long bull markets. People are used to the old prices, and the new prices seem too high. For example, in mid-1973 gold seemed too high at $120 to people who remembered it at $35. So they sold it off to $90 by Thanksgiving. There were many such sell-offs on the way to $875 (in 1980), and there will be many such sell-offs in the grand cycle bull market which began in 2001.
Third, during the July-August sell-off it has been widely reported that actual gold demand from the gold markets around the world has increased. For example, gold below $800 was a big temptation for the people of India, and they responded by buying heavily. (Similarly, by late summer gasoline close to $3.50 was a big temptation for Americans, and they responded by taking out the old SUV and hitting the highways.) Some commentators complained that the law of supply and demand had been repealed. Here was big demand coming in to the gold market, and yet the price was declining. No fair.
But of course, the law of supply and demand cannot be repealed. Like all of the laws of economics, it is based on the fact that one cannot get something for nothing. What is the explanation? Let us look at what the large traders were doing in the gold market from the top in mid-July to the bottom in early September.
Here we see the cause of the July-August decline in a clear and simple manner. The large speculators, who of course are the commodity funds, sold gold heavily in this period. Notice that they bought heavily between Aug. of ’07 and this past Feb. As far back as I have gone, these people – supposedly the top, highest paid money managers – have been mostly wrong on the intermediate swings. They are out of gold at intermediate bottoms and heavily in gold at intermediate tops.
There is something seriously wrong with speculating by hiring an “expert” to do your trading for you. The “expert” will show you very impressive credentials. So you relax and don’t think about it very much. But your “expert” is not an expert at trading. He is an expert at manipulating people. He knows that, if he acts against the conventional wisdom and it goes wrong, then his clients will desert him. But if he plays it safe and goes with the conventional wisdom, they will stick with him through big losses. Therefore these funds behave according to the conventional wisdom. That is why their behavior is predictable, and that is why they are wrong so often.
What happened this summer was that, as the fundamental demand came in from India and other places, it was offset by speculative selling on the part of the commodity funds. This explains the paradox of gold declining when fundamental demand was strong.
I am very much against the concept of assigning another human being the title of expert and using that to substitute for your own judgement. (If he has proven, to your satisfaction, that he is an expert, then fine. But most of these people have not proven any competence. They have just taken a lot of fancy courses and have gotten a lot of impressive titles. But they can’t do anything. You all know what happened in 1998 when the hedge fund LTCM, based on the ideas of two Nobel Prize winners (Morton and Scholes), lost $4 billion and went belly up. A lot of people gave their money to LTCM because they are in awe of the Nobel Prize. (By the way, there actually is no Nobel Prize in Economics. Economics was not mentioned in Nobel’s will, which set up the prizes. 70 years later someone else came along and decided to cash in on Nobel’s fame to promote their own prize.)
My target audience is the trader who does his own thinking and who relies on the judgement of his own mind, not on the “expert.” I offer this trader my advice and my arguments, and he can evaluate these himself and then make his own decisions. I do maintain a Model Conservative Portfolio just so that subscribers can see how they would have done if they have followed me every step of the way, but many of them simply find that my thinking stimulates their own and helps them to form their own judgements.
If you want to get a sense of what the One-handed Economist is about, I invite you to visit my web site, www.thegoldbug.com. This is free, and on my blog you can find social commentary (with an economic slant) which comments on the events of our day from a pro-freedom perspective. You can also subscribe to the One-handed Economist for $300/year (and as the value of the dollar goes down, I am thinking of raising the dollar price). This is a fortnightly newsletter (8 pages) with special bulletins which comments on all of the financial markets (with special emphasis on gold and commodities) and makes specific recommendations on what to buy and when to sell.
Gold is going up. If you are one of those people who does not want profits, then you can just keep your money in dollars and watch them lose value. But don’t say you weren’t warned.
Howard S. Katz
-- Posted Tuesday, 23 September 2008 | Digg This Article | Source: GoldSeek.com
