1. News of the day has to be Big Jim Sinclair's warning: The uptick rule may be on the verge of being re-instated. He feels there's a 90 day period where junior gold stocks, and perhaps any gold stock, could take a bad hit.
2. Because the shorts will make a last desperate play to smash the prices of gold stocks so they can get out of their short positions while panicked gold stock investors liquidate.
3. Jim warns: "Be Prepared". Well, my own motto is "Are You Prepared", so I had better be able to walk the talk.
4. Let's go over Big Jim's "be prepared checklist" and see if we get a passing grade: He warns against margin. I have no margin, and few of my subscribers are using margin. Check that off.
5. We need to be prepared for "dirty tricks". I believe Jim is referring to smear campaigns against good gold companies. Media stories that are misleading and/or outright false. Well, my actions are ruled by PRICE. I follow charts, fundamentals, news. But my actions are determined by price. Price falls, I buy. Price rises, I sell. An attack by the shortsellers would drive prices down...
6. So I translate Big Jim's warning to: Get my gold shopping cart into the gold grocery store. Stay there and don't leave. Contact all my subscribers and have them monitor as many quality gold situations as possible for attacks from the short sellers. As those attacks occur, into the shopping cart go the stocks. Let's pretend we are all as smart as the housewives in the grocery who never ran a business, but know more about buying and selling than 99% of the world's so-called savvy investors. They walk around with a FLYER. That says, "tomatoes on sale". They walk to the tomatoes section and put some tomatoes in the cart.
7. Let's see if we can manage to do the same in the gold market.
8. I think I'll send a note to a thousand hedge funds: "Expert seminar on advanced trading techniques: held every Saturday in your local grocery store. Please pay the elderly lady in the tomatoes section and pay her $1000 an hour for your advanced instructions". Sadly, many fund managers would actually trade better if they actually did this.
9. I don't believe the smart move is to bail now and then try and pick the bottom later. How many bought at 680, the last gold bottom? I'd rather place a series of buy orders in a pyramid formation going down. That way my largest buy orders will automatically be filled at whatever price the ultimate bottom for gold is.
10. If you sell now, and the shortsellers fail in their game to smash gold stocks, you won't have any gold as it soars higher.
11. Jon Nadler of Kitco has suggested a 10% insurance policy in gold. I think that's a sort of very bare minimum, but I don't think 10% is enough to insure the other 90% of your money. But better to place 10% carefully in pre-set stages on weakness, than 30% in a one-time plop in a price chasing frenzy.
12. The current media game seems to be to convince everyone that the OTC derivatives crisis, renamed the credit crisis, is somehow fading away, and the G20's "brave actions" are going to be saving the day.
13. Here's my view of the G20 leaders: We have 20 photocopy machine operators sticking money in the photocopier 24-7, while handing trillions in worthless bank OTC derivatives to taxpayers, and we're supposed to all get on our knees and pray to these photocopier operators. Ok, Mr GMan, congratulations on pushing the green start button successfully, here's your golf clap. Now move out of the way, I have some gold to buy.
14. The legalization of fraud accounting for OTC derivatives valuation has opened the door for the bankers to receive huge payments for zero value OTC derivative contracts. Likely bilking 2-3 generations of taxpayers.
15. Notice how OTC derivatives contracts are referred to in the media as having a "maturity" value, not an "expiration" value? The bankers want the taxpayer sheep to subconsciously think of this garbage as a bond, not a super high risk, ultra-levered speculation.
16. I have suggested to my subscribers that SDRs (special drawing rights) are perhaps better named STPs. Special Toilet Paper.
17. I notice a lot of the gold analysts staying quiet this week. The writers are, of course, in the gold markets themselves, many at higher prices. Some may have engaged in futures and options trading with what I would term excessive leverage. When gold takes a hit, it can be tough to write when the screens turn blood red. Especially if those are high leverage margin account screens.
18. I want to mention the futures markets, which have a very bad name. The futures markets are amongst the safest markets in the world, if you use no margin. The checks and balances in place, the clearinghouse system, is A1. If you want to buy physical commodities with a high degree of account safety, that is the place to consider. If you fall into the leverage trap, well, that's exactly what the bankers that run the futures markets want you to do. "We give you the chair, the rope, we'll even put it around your neck. And if you like, we'll even kick the chair out from under you." That's how the bankers view their highly margined futures clients. What a clearinghouse does is allocate money from the accounts of the day's losers in the futures markets, to the day's winners. So, unlike with an OTC derivative, a fully paid futures position cannot get "out of hand".
19. Some have suggested options as a way to get unlimited upside with limited downside. I would suggest that fully paid junior gold stocks are like an option, but without the downside of a fixed expiration date. Most options traders buy short term options. Long term is 2 years. If you bought options in May 2006, well, now it's 2009. You know the scoreboard. After reading what Jim Sinclair has to say could occur in the next 90 days, I personally would not want to be holding anything due to expire in that time frame.
20. India has said they want to buy gold at 850. That's what I want to see. I want to see gold at 850 and hold there. As I go into the technicals below you'll see why.
21. What about if 850 breaks, what will it be then? Then I take my mask off. Mr. PitBull comes out to play. And I start putting some of my 40% cash position to work. I join the bankers in a ROBBERY of the speculators. "Hands up, gimme your gold now!" If 850 breaks, I really hope you don't join the "I surrender" team. 850 gold will likely be seen as cheap in time. Here's the weekly chart:
22. First of all, what I see here is the RSI has come down from about 70 to around 50. Major tops usually feature the RSI staying above 70 for awhile before declining. This time, RSI just nosed towards 70 and then declined. Suggesting more of a pause than a frothy speculative top.
23. We are right in the middle of the keltner band lines. Neutral territory.
24. Stochastics has come down to about 50.
25. MACD and TRIX are a little more worrisome. The bulwark 12,26,9 series of MACD just went to a sell signal, following the shorter time series. The TRIX is doing the same thing.
26. Look at the price chart itself. Jim Willie, PhD, has noted a cup and handle pattern on this chart. Usually the handle is formed in a short duration of time, but with weekly charts that's not always the case. If the cup and handle were to fail, it could actually morph into into a very symmetrical head and shoulder consolidation.
27. This is what I hope to see. Notice the blue circles I have drawn on the chart, with the left shoulder highlighted with an elipse.
28. If gold were to mark time around the 850 area for 1-2 months, the technical indicators of RSI, stochastics, MACD, and TRIX would all likely drop lower. Price doesn't have to fall for these indicators to fall. Sideways action will also work.
29. This potential sideways action would set up a major right shoulder. The left shoulder is about 3 months in duration. The right shoulder at this point is only 1 month in duration.
30. It would really take a break below 800 to destroy the h&s pattern. There is substantial head and shouldering action that has occurred from the low at 680. The giant flag pattern is valid, the cup and handle is valid, and the head and shoulders is valid. Even if 800 breaks, that simply opens up a huge 700 to 1000 consolidation range pattern. With a target of 1300.
31. Let's move on to the daily chart. Here it is:
32. First, notice the RSI, the relative strength. Coming down towards 30. That's very positive.
33. Next, the gold price is now touching the lower keltner demand line. Another positive.
34. Stochastics have come down to a level that has seen $50-100 gold rallies follow.
35. MACD still could go lower, but it has more of a "drifting look" for all 3 time series.
36. The TRIX also has that drifting look. I don't see anything terrifying looking at this chart.
37. Bottom Line: If you take the scare mask off the analysts trying to terrify you into bailing on your gold, you'll see a little kid underneath. Some of you own very substantial businesses. Would you bail on your business because some kid in a Hallowe'en mask told you to? No. Well, write this down and paste it to your computer in neon lights: Physical gold ownership is only about 500 billion times less risky than your own business. The odds of physical gold going to zero are nearly infinitely less than the odds of your business going to zero. You'll be dead and gone, and so will your business, long, long before gold bullion bites the dust. So, when the gold analysts show up at your gold door trying to scare you out of your gold, here's my suggestion: Rip their little masks off and tell them: "You don't scare me at all. All I see here is a little boy. No gold candy for you, get lost!" And slam the door. Then, if the gold price is falling, walk over to your computer and push your "buy gold now" button!
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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.
Are You Prepared?