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Gold School: Report Cards are out!

Stewart Thomson
May 15, 2009

1. It's Friday! Every Friday two very important reports come out. The first is the gold market COT report. The bottom line report card on what the major players did in the gold market over the previous week. Most traders ignore it because it isn't "up to date" enough. Which is like ignoring the fact that a herd of elephants trampled thru your house a few days ago. You can't ignore the action of the biggest players.

2. The second important report card is... Our own! It's very important that investors maintain a positive mental state. At the end of each week, the markets have usually either risen or fallen in price. Generally speaking, if the price of gold has fallen during the week, the COT report will show the larger players are holding more gold than they were when the week started. Likewise, if the price of gold has risen, the "gold elephants" have less gold. Our own report cards should show the same action, exactly the same. When the trading week ends, if the price is up, I give myself an "A" if I'm a little lighter in gold and gold stock. If the price is down on the week, I must have slightly more gold than at the start of the week.

3. In all the many years I've followed the COT reports, never have I seen a single week where the biggest players as a group take rash action. When I use the term "biggest players," I'm referring to the bankers. The weekly percentage changes in position are not that large, but they are very real.

4. In contrast to actions documented by the COT reports, I've seen individual investors engage in market action that can only be termed: bizarre and surreal. Entire portfolios blown out into the exact bottoms of major bear markets. Massive loans taken out against homes to buy funds with stocks with average p/e ratios of 50 to 1. And worst of all, report cards with straight D's on them. When you buy strength and sell weakness, you get a D. Let's get focused on the report cards. First, the bond market. Last posting, I went over the game played by the primary dealers at Treasury Bond auction time. Many tried to call the top of the bond market. Did you make any money? Or did you get cooked on your shorts when the dealers covered, and the bond lept up for four days in a row? There is a way to make money shorting the bond, but it requires a daily report card.

5. I personally have no interest in shorting the bond. My interest is in buying it. Not now. When it breaks 100 I'll put a microscopic toe in the water. Every point it falls I'll buy more. It's over 120 now. I couldn't care less about shorting the bond down to 100. Give me a chance to grab 6% a year for 30 years, or 8%, or 10%, or 15%... I'll take ALL of those! It's a cold hard reality that institutions will buy bonds, and hold them, when the govt bond pays them 8%. They will transition out of stocks and into bonds. Why? Because 8% is the number a high net worth individual is satisfied with. Stocks, with tremendous risk, have historically returned about 8%. If they can grab 8% on a govt of America guaranteed T-bond, institutions will be buyers in size. And they will be buyers well before the yield hits 8%. The current moves you have seen into bonds are moves out of fear. Temporary moves.

6. I don't want to own bonds now, because the interest is so low that T-bills under the mattress is arguably safer. I'll show you today how to short bonds, if that is your game. But you are far better off to focus on professionally buying and selling gold now, and apply those tactics to bonds later. After they melt away. Because Mr. Bernanke has the ability to print unlimited amts of dollars to buy bonds, in theory he could bid bond prices to infinity, regardless of what any other players did. Of course, that result in a complete mauling of the US dollar in the process. Here's the weekly bond chart.

click for full size chart

7. Notice the red horizontal resistance at 125. Bears are focused on this number. I want to remind the bears of the supposed "cement lid" on the US dollar index at 80. A lid that was supposed to end the USD rally. Instead the dollar went thru that resistance like a knife thru butter. Don't bet your life on the resistance at 125. The Stochastics have crossed into a buy signal, and the MACD is overdone. Legions of traders have tried repeatedly to call the top in bonds and failed repeatedly. If you repeat their tactics, odds are that you too will fail. Many have lost all their risk capital with a multitude of stop losses triggered.

8. In your battle against Mr. Bernanke, who is armed with the world's largest photocopy machine and his set of chart painting brushes, you need maximum weaponry. Not a popgun. My subscribers who are shorting the bond have an entire "armed force" with various parts of their risk capital doing different things. Here's the TBT-n chart. A leveraged bear longterm bond fund. The current price is around 48 dollars. What my Pgen (pyramid generator) does is give you the ability to be a player at any point on what is really a simple 48 point playing field. The Pgen systematically allocates your capital over ALL the points. You are a buyer of TBT right here, right now. If price moves against you from here, you are a buyer, not a bailer. Unless TBT goes off the board, you can't be taken out of the game. And even if TBT went to zero, it's unlikely to do so in a gap down. You are likely booking dozens, maybe even hundreds of winning trades, long before that occurs.

click for full size chart

9. What could cause bonds to melt away in a real bear market? Well, memories of the Lehman bankruptcy are still fresh on investors' minds. Is there a pile of OTC derivatives under the Chrysler rock? Perhaps another major company will go under in a surprise, and we have an even bigger repeat of last year: Down go stocks, down goes gold stocks, down goes gold bullion (limited), and up goes the dollar and up goes bonds, right? I'm not so sure about that. Another bankruptcy equal or perhaps significantly larger than the Lehman bankruptcy could cause another charge into bonds. But of equal probability: That event could cause mainstream institutional investors to believe the system no longer was at risk of failing, but that it IS failed. That could cause a "bypass of bonds" as a safe haven, and into physical cash and Gold.

10. The general public is still largely in the stock market. One of the greatest market errors made by amateur investors is the belief that because a market has stopped falling, it must now start rising. The public bought more stock recently. If the Dow were to break the lows at 6500, the public would become totally demoralized. Bank and market closures would become likely, which would also cause many investors to bypass T-bonds and buy gold. When the doors on your bank are physically locked shut, and there's no cash in the bank machine, you want two things: Cash and Gold. The very last thing on your mind is buying long term bonds because of some libor or ted spread ratio. The thought is, "Gimme some liquid money, and gimme it now!" For those of you who have taken zero action to store some emergency cash outside the banking system, I hope this picture of reality is enough to cause you to take action. Right now. Prepare today because it's totally impossible to prepare after the banks are already closed. Just as the public buys stock after the price has risen, they will seek to prepare themselves against bank closures... after they are closed! Huge lines will form in front of banks. Do you want to be one of the bustouts standing in those lines? Line up now for your emergency cash. There's no waiting, and since you're the only one in line you can take out what you need in stages - on your own time!

11. As many of you know, I consider Richard Russell the greatest living expert on the Dow. He says he's basically divided his capital between US dollars and gold. Many think hyperinflation is coming, and perhaps it is. If it does, the US dollar position will be wiped out, yes, but gold will soar many times over. An overall big victory. If deflation roars ahead, the US dollar will soar, but gold won't collapse.

12. I trade the US dollar. I trade gold. I don't use stoplosses on either. Gold is the world's lowest risk investment. Why would I sell it at a loss? If the US dollar goes off the board, my gold will be far beyond the STRATOSPHERE. If the US dollar falls to 50 on the index from the current 82 area, I want to be a buyer. The ideal situation would be for the US dollar and the bond to be deep in the throngs of a bear mkt near the USD 50 area. Jim Sinclair, the world's largest gold trader, believes that a "revitalized" gold standard via a quoted ratio of gold to USD supply, will halt the USD bear mkt. Probably around that 50 level. But if the ratio is not put in place, the USD could spiral lower and real hyperinflation could take hold.

13. The US dollar chart may have a head and shoulders top on it right now. Rather than shorting the USD, which exposes you to unlimited risk, my suggestion is to BUY a USD bear ETF. Like UDN-n. Here's the weekly chart:

click for full size chart

14. UDN has rallied from about 24 to 26. I wouldn't buy it here. Notice the weekly Stochastics going into the overbought zone. I don't see anything wrong with buying at 26, but I want to do it on weakness, not on strength. UUP-n is a US dollar BULL ETF. I think a lot of gold investors are making a substantial error trying to short the USD while owning gold. In the 1970s bull market, the USD mounted a huge rally as gold made its biggest upmove. My suggestion is to move in and out of bets on the USD itself. While selling the UUP you are buying UDN. And vice versa.

15. Gold is a separate bet. I buy gold because it is the world's lowest risk investment. Not because the US dollar might disintegrate. All paper monies are nothing more than insults to gold. The average investor has no clue whatsoever just how low risk gold is. In fact, the average investor actually believes gold is a high risk investment. Gold stocks are high risk. Not gold bullion. In the ultimate big picture of risk, the US dollar is a tiny fly compared to gold. Gold is the ultimate trading vehicle because it has the lowest odds of going to zero of anything on the planet. Yet on a percentage basis, probably more panic losses are booked on gold trades, than in any other market.

16. If you can't trade gold, you can't trade anything. Don't focus on how high gold is going. That will destroy you. Focus on the fact that gold almost "can't" go to zero. Everything else will look after itself. One well known analyst says just put 10% of your money into gold and leave it there as an insurance policy. To me, that's like putting a block of marble in front of Michaelangelo. And telling him not to touch it or he might wreck it!

17. I have an ARMY of subscribers who trade gold every day using my Pyramid Generator. Who book profits all the time and NEVER book a single loss. Here's the daily gold chart:

click for full size chart

18. I don't see anything of concern here. Stochastics is overbought. Fine, I've been booking profits into the strength. Stochastics can stay overbought while prices rises much higher.

19. Here's the weekly chart. This looks spectacular. Notice the shortest time frame MACD series. Touching, about to give a buy signal. Stochastics is becoming oversold.

click for full size chart

20. Of course I'll be a buyer on any weakness. The head and shoulders consolidation looks like a work of art done by Michaelangelo himelf!

21. Let's sum up the week with our report card. I demand I end every trading week with Victory. This week I count multiple wins in Oil, Uranium, Dow, Gold, Food. Price was generally up this week, so Victory is measured in booked profits. Your report card should show you carrying a smaller number of trading positions in these items and more cash in the accounts. What will next week bring? If price is down, Victory is measured in more ounces, barrels, bushels, shares. Allocate your risk capital so you are a player at all price levels. When the banker paints YOUR stock's chart price down for the week with a big red "sell now" job, you want to be able to grab your own gold paint brush and paint in big bold letters across their sell game with your paint: "Buy here, buy now!"


May 15, 2009
Stewart Thomson
Graceland Updates
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Risks, Disclaimers, Legal
Stewart Thomson is no longer an investment advisor. The information provided by Stewart and Graceland Updates is for general information purposes only. Before taking any action on any investment, it is imperative that you consult with multiple properly licensed, experienced and qualifed investment advisors and get numerous opinions before taking any action. Your minimum risk on any investment in the world is 100% loss of all your money. You may be taking or preparing to take leveraged positions in investments and not know it, exposing yourself to unlimited risks. This is highly concerning if you are an investor in any derivatives products. There is an approx $700 trillion OTC Derivatives Iceberg with a tiny portion written off officially. The bottom line:

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