Buy with both hands
When you are searching for information about investing, you are going to run into two totally contrary forms of information. There are those I call the "Cheerleaders" who specialize in telling you want you want to hear. We all know who they are. They are quite popular because they indulge all your fantasies. Whatever you want to hear, they tell you:
Gold and silver are going to go up every single day. There is no such thing as a correction. If the price of gold or silver goes down, even for a day, it's because of some mysterious group they never really identify or prove exist. There's a cabal and it controls everything in your life. You can't make a bad investment decision, if your stocks go down, it's because "THEY" made them go down.
I call them "Cheerleaders" for a simple reason; they stand on the sidelines and howl at the moon. They aren't players, just cheerleaders. They specialize in figuring out what you want to hear because that's what they are going to feed back to you.
Then there are those who tell you not what you want to hear but what you need to know. There are far fewer of these guys. They aren't nearly as popular as those who tell you what you want to hear but they are the ones who will help you make money. I think of it as the difference between signal and noise on a radio transmitter. You need to hear the signal, that's the important part. You need to learn to ignore the noise.
One of the ways I figure out which is which is to ask myself, when silver and gold finally hit a major top, is this guy going to tell me to sell or is he going to be braying "Buy" at the top of his voice? I was a commodities broker for a very short time in 1984 and I saw the files of literally hundreds of people who had made fortunes in late 1979 and in early 1980 only to lose every penny because they wouldn't take profits. They were listening to the cheerleaders and ignoring the players.
I spent ten days trying to warn people of an upcoming violent correction. It wasn't popular because it was so contrary to what people think. That's how and why I made it. When you can't buy a silver bar because the demand is so high, you are at a top. When do you expect to run out of silver bars? At a bottom?
We have had our violent correction. The number of gold contracts and silver contracts were at record highs. Before this correction ends, I expect to see those numbers cut, perhaps in half. Most of the damage has been done to gold and silver but another month or so of correction would be about right.
That said, another technical indicator that I put a lot of value in is also at an extreme of emotion. I use a chart of the XAU over gold as a pure measure of psychology. Investors can either invest in gold or in gold shares. This index shows the ratio between them. When people are very bullish on gold the number is high, when people are very bearish on gold shares, the number is low. It tends to show turning points for both gold and shares but it isn't perfect. It didn't predict last week's carnage but bullish consensus and the number of contracts outstanding did.
This is going to be a really weird prediction. Last week I nailed the biggest and fastest gold and silver correction in history. It was the best call anyone has made for 28 years on gold. This week I'm going to predict gold shares are going to explode upwards starting immediately. ESPECIALLY the juniors.
Now that's a switch. But here's the logic behind it. If you look at the XAU over gold, it shows a low in the ratio in May of 2005 and another last August. From May of 2005 until the next high in Feb of 2006, the XAU climbed from about 78 to 155. From the low in August of last year to November, the XAU rocketed from 125 to 190.
The juniors didn't participate in the rally since August. Many are the same price they were in August. Some are lower. Jim Sinclair and John Embry believe that hedge funds have shorted the juniors. I don't totally buy that. If there was some giant short position, it should show up. And while short positions in many juniors have gone up, they aren't much above 1%, which is nothing for a NYSE stock. So I'll just say that I'm not totally convinced. But if they are right, those same shorts now are going to have to cover. Gold could easily correct for another couple of months and the gold shares and especially juniors could rocket.
The lowest the XAU over gold ratio has been in three years is .183. I think that's the lowest for five years but I can't prove it with my software. On Thursday of last week, the ratio dropped to .183 and closed at .187. Thursday of last week should have marked the single best day to be buying gold shares in the last five years. There is nothing saying the ratio can't go lower but if it does, it just means it's building up more pressure when it does explode.
There is the interesting issue of just where we stand financially. I have done my very best to make it clear that I believe we are entering a major depression. There is the issue of $516 trillion dollars worth of derivatives. Much of it has all the value of used toilet paper.
Anyone mumbling about sub-prime mortgages or even prime mortgages just doesn't get it. Those are a tiny part of the issue. The issue is $516 trillion dollars worth of Monopoly money floating around the giant crap game we call the world's financial system.
Hedge funds and banks are cratering everyday. It's not going to stop until it takes down the entire financial system. I don't care how many $200 billion dollar band-aids Helo Ben patches on the system, it isn't going to work. The entire banking system is underwater. The system is going to fail totally and globally.
That's not a big deal unless you are the world's biggest debtor. [thanks, Matthew for the correction] If you are, you have a giant problem. Countries such as India, China and Japan that actually produce real products are going to come through just fine. I was just down in Argentina a month ago. Their system froze up 5 years ago and you couldn't touch your money for 6 months. They are going great right now. It's a very dynamic country and thriving. That's not going to be the story in countries that count making hamburgers as manufacturing. [Editor's comment: That statement should go down in the 'Unforgettable Quotes' list.]
After a short and brutal correction, gold will resume its climb. Gold and silver have not peaked. They are money and when all currencies fail, they will be the last man standing. We will go back to a gold standard not because anyone wants to but because there will be no other alternatives. Whatever country goes to a gold standard first will have the new world's reserve currency.
But what of demand for such basic commodities such as copper or the base metals? Rick Rule did an interview and had some great comments on the demand for copper. I agree with the Chinese. Demand may crater in the US but the Chinese are quite capable of consuming and they can pay for what they buy.
Buying gold stocks in the middle of a gold correction may seem a bit contrary but contrarians make money. Gold moved from $650 to $1030 without moving the juniors. If it can do that, it can move from $1030 lower and still have a gold share boom.
I'm a buyer and you should be buying with both hands. You are always playing the odds and the odds favor a 50% move higher in the next six months. That is what has happened every other time the ratio got so off balance.
NOTE: By the time you read this I will be winging my way to S. Africa to visit Diamonds and Iron :-)
SA is not the easiest place from which to access the www so I request that you do NOT send me email until April 7th.
written Mar 22, 2008