1. "Does anyone know what just happened?" -John Templeton, after the stock market crash of 2000.
2. What "Sir Johnny" meant was that a catastrophic event had just occurred, an event that would not be repaired in any short period of time.
3. Below is a current chart of the Dow.
4. I'm afraid I'm going to have to repeat Sir Johnny's words to the gold community:
5. Does anyone know what just happened? Look at the chart. What did I say when the Dow broke major support around 7200? I said "prepare for a possible crash. Take money OUT of the banking system regularly. And secure your gold."
6. I also said, "BUY the Dow." As an insurance policy. Against various gold risks, including confiscation. Screaming "they'll never confiscate gold!" may make you a prophet if you are correct, but if they do confiscate, that hard-headed approach WILL make you made a pauper if you have all your money in gold, and they take it away. And then you get to sit back and watch while gold is revalued upwards, perhaps ten fold. In a hyperinflation situation, stock markets tend to soar, at least initially. Allocating 5% to 10% of liquid assets to the Dow, buying in a pyramid formation all the way to Dow zero, is what I'm talking about. Not a one time price plop.
7. What happened since I said buy the Dow? The Dow fell a few hundred points and then exploded upside. Real fear is creeping into the mind and body of the shorts.
8. Maybe this is a bear market rally. Maybe the insiders, who bought large near the exact bottom, know something about hyperinflation, and are positioning themselves while the public loads up on cash. Cash that would become worthless in a hyperinflation.
9. When a major support level fails, there is no law that says the market must start falling immediately, or at all. Large rallies after a major support failure are just as common as crashes.
10. I'm a little worried about the tactics used by many in the gold community over the past few years. The phrase "all in" is probably the single most dangerous market action an investor can take, in any market, at any time.
11. In addition to a vast array of gold positions, many gold investors are carrying additional positions shorting the general equity market, shorting the bond market, shorting the US dollar, buying foreign currency futures. That, in addition to carrying 50-75% of their net worth in gold.
12. This is bigtime overkill. You do not need an Indy car to drive to the store to get milk. If you own gold bullion and some gold stocks totalling 25-50% of your liquid net worth, that is more than enough insurance against whatever is coming. Particularly hyperinflation.
13. If you hold half your net worth in US dollars, and half in gold, and the US dollar went to ZERO, gold would probably be a minimum of $10,000 an ounce. Maybe ten times that. If gold rises 10 times in value, and the US dollar goes off the board, you are sitting in a very good position.
14. While the weekly chart of the Dow shows the Dow could rally much further, the daily shows we're getting a little overdone. 8000 is a bit of a psychological number. Stochastics are into the overbought zone, MACD histograms are fading, particularly on the shorter time frame series. The Dow is banging into the upper Keltner supply line.
15. If this is a bear market rally, it could end even more suddenly than it began. Here's the Dow daily:
16. Institutions are sitting with nearly $10 billion in cash. If they get the idea that hyperinflation is coming, they could storm into the stock market. Causing the Dow to hyperinflate. If you are currently short the Dow and long a lot of gold, I would use any Dow weakness to exit some of your short positions. Cut down on the overkill.
17. Some of you are not only driving an Indy car to the store to get milk, you are driving a whole fleet of Indy cars to get the milk.
18. I want investors to think about the Cbone. That's the term many bankers use for the Canadian dollar. Some call it the cando. The Cbone is perhaps the ultimate commodity currency. Many of you are buying gold and resource stocks that trade on US exchanges in US dollars.
19. The bankers, as shown consistently in the recent COT reports, have been adding Cbone longs, while the speculators have been building a totally lopsided short position. And, big surprise, the Cbone has started to rally. Crushing the speculators and enriching the bankers. Canada is home to the tar sands as well as the Toronto Stock Exchange. Which is where most of the top junior, intermediate, and senior gold companies trade. And trade in Canadian dollars!
20. One of my buddies is a retired major bank trader, who handled large amounts of the bank's own money. He has been buying the Cbone personally over the past month. Placing bets directly against the hedge funds who are shorting it. I meet him regularly for coffee every month. He's got the face of a pitbull. He respects what I do with gold. I respect what he does with the Cbone. Later in this piece, you'll see what Jim Sinclair, Mr Gold himself, thinks about the Cbone. I do not bet against Jim Sinclair in currencies. Gold is the ultimate currency, and in the gold community, he probably holds the ultimate long position. If you hold gold stocks, you need to understand the Cbone, and where it might be going.
21. Here's the monthly chart. The indicators are drastically oversold. Of particular interest to me is the 5,10,9 series of the MACD. I show that at the bottom of the chart. Notice the steady rise in the histograms (the green "pipes") and the sharp hooking up in the black line. RSI has hit 30 and is bouncing, while price has banged into the green Keltner demand line. Stochastics are drastically oversold.
22. Rather than getting into currency futures trades, my thinking is to simply buy gold stocks that trade on the Toronto Stock Exchange (TSX). There are a number of brokerages that allow you to do this, American brokerages. Some of these brokerages allow you to allow buy and sell US currency at far better exchange rates than you get in the bank, in small $1000 increments.
23. The daily Cbone shows a different picture. With price hitting the upper Keltner supply line, stochastics overbought, and MACD histograms fading.
24. I believe the monthly chart "rules" the weekly, and the weekly rules the daily. And price rules all. Meaning I only buy weakness and sell strength in anything. I never buy breakouts or chase price. A breakout is a positive sign, but when it comes, I've already bought.
25. The Cbone to me looks extremely positive, and if the coming weakness hinted at by the daily occurs, I would be a buyer all thru that weakness.
26. Jim Rogers has stated that commodities are the only major asset class he feels have a FUNDAMENTAL bull case that is valid for years to come. My strongest suggestion is that rather than trying to play "short Citigroup at 4 dollars a share because it has to go down," work to build some positions in commodity stocks and professionally manage those positions.
27. Rather than playing the futures markets with leverage or at a single price point on a cash basis (which has been demoralizing for those that have been holding over the past year), I suggest you use the ETFs to accumulate a position in commodities right now. Don't try play timer with when "the big one" is coming.
28. Whatever you do, don't blow out your gold bullion core position "to get back in cheaper". ETFs can go broke, your Dow shorts can blow up or be legislated out of existence. Physical gold in your hand is not going anywhere. It can't even rust, let alone disappear in a paper fraud. You don't trade your car insurance policy on an exchange. "Yeah, I paid $1500 for my policy 2 months ago, the bid is $1625, maybe I'll take a profit on my policy now, get in cheaper later, and drive around with no insurance for awhile." Does that sound rational?
29. No. Don't trade your gold bullion insurance policy like that either. If you got greedy and bought 40 gold insurance policies on leverage instead of 1 policy for cash, sell into strength and reduce your insurance to 1 policy that functions as a designed: real insurance against the coming wipeout.
30. My view: have fun trading. I am. For now. I focus on doing a good consistent job trading, not on how much "beeg mowney" I can make.
31. But while having fun trading: keep in mind that a economic WIPEOUT is coming.
32. What you have seen so far is a markets wipeout.
33. My view: The current supposed economic "disaster" is only in the warmup act. The main act has a 90% chance of making its appearance, and when it does, those with no insurance, may lose everything, including, sadly, even the will to live. That insurance is what I refer to as the gold inner core. Which should form approx. 33% of your total exposure to all things gold. I would suggest you do whatever it takes to ensure that 1/3 of your total gold exposure is physical gold bullion. If you want more, fine.
34. Shorting the Dow or buying it as a bet on hyperinflation, buying the Cbone, shorting bonds or buying them, none of these things qualify as the kind of insurance I'm talking about. They won't help you in a nightmare situation. Only physical gold bullion will do the job.
35. Once you've taken care of that, the work, THEN have all the fun you can with trading!
36. Jim Sinclair has spoken about a long term bull market in the Cbone that could ultimately see it rise to as high as: 1.70! That is a double from current levels! He moved a good chunk of his money into the Cbone. He says he's holding his position. I wonder why... Half of the gains of the Cbone bull market from .62 to 1.10 were wiped out when Lehman failed. But signs are appearing that the bull may be about to reassert itself. And perhaps in a very big way as Ben Bernanke begins his next move to revalue the US dollar... down. In my letter, I cover an ETF to play the Cbone either to speculate or to hedge US stock positions. In futures markets your minimum bet is $100,000. A lot of money to place at one price point. In the forex market it's $10,000 at most places, still a big risk for one price point. With the Cbone ETF, you can place bets as low as about $100, or as big as you want. Allowing you to build your own Golden Spinal Column, the Cbone, in careful small toe in the water stages, one small Cbone at a time!
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Stewart Thomson is a retired Merrill Lynch broker. Stewart writes the Graceland Updates daily between 4am-7am. They are sent out around 8am. The newsletter is attractively priced and the format is a unique numbered point form; giving clarity to each point and saving valuable reading time.
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