Our friend Chris Powell says, “There are no markets anymore – only interventions.” I agree. But interventions can’t change the course of a major trend. They can and do have short-term ramifications but bull and bear markets will ultimately play out in spite of short-term manipulations.
I also believe that there is no such thing as “investing” anymore. Investing has become gambling. The world is awash with money, courtesy of the global central banks and especially the Fed. The money is not evenly dispersed; it is concentrated in the hands of a small number of TBTF banks and large hedge funds. They invest other people’s money (OPM). They take risks that you and I would never take with our own capital. They do not consider the long-term prospects of their investments. They are primarily concerned with their immediate profit and they move in and out of their investments at a moments notice. Every fund manager is out to beat the competition. That’s a very difficult thing to accomplish. The funds can’t sit on cash and they can’t make any money investing in safe government bonds or money market funds due to the Fed’s ultra-low interest rate policy. They have to go after more risky investments and they have to employ serious leverage. They rely on computer algorithms rather than their own common sense to make their entry and exits. The computers move large sums of money into and out of a given stock or sector at a moments notice. If you and I try and make money in markets that are monopolized by these fickle, deep-pocket hedge funds, we will not fare well.
Most of the funds use the same moving-averages to time their buy and sell moves, which means a majority of them are always on the same side of the market, either long or short. That makes for very volatile markets and easy to manipulate markets. All it takes for our friends at JPMorgan to crush gold or silver is to sell enough contracts to force the price down to a level where the computer algos of the funds automatically join in and add to the selling, which forces the price lower and then more funds join in and the fall is big. This is not investing – it is gambling and it is pure manipulation. But when it comes to gold and silver (physical), as the price falls, the buying increases from India and China. Soon, the price reverses and is back to where it started in the first place. The only way for the average investor to make out is to sit tight and not sell during the dips. Buying the dips is a good strategy, but I rarely sell at the tops. I adhere to Russell’s philosophy of accumulation.
The current advice of most of the financial newsletters is that you can no longer succeed with a “buy and hold” strategy. That is probably true in most cases, but it is not true when it comes to gold and silver. In this sector, you must rely on a “big picture” philosophy and ignore the whipsaw up and down movements. The daily moves are nothing more than “noise”, as Jim Sinclair wisely notes. Richard Russell never sells his physical gold. He just keeps buying more and more, over time, and was the first to write that it is all about the number of ounces you own, not what you paid for them.
It is abundantly clear to me that it makes no sense to sit on a large dollar-based portfolio. I really don’t care about the day-to-day movement of the metals. I don’t care about the day-to-day movement of the dollar. The dollar is a currency whose time has come and gone. I have personally witnessed its fall from grace over the last 50-years. When I graduated from college in 1964 I dreamed of the day when I would earn $10,000 a year (my first job with Helene Curtis paid me $400 a month) and when I could afford a $20,000 house. Our first house, in 1967 cost $17,500 and in 1972 we built a four-bedroom colonial in the suburbs for $35,000. I earned $30,000 in 1971 and had trouble spending it. In the 70s I bought two new Corvettes for around $5,000 each and two Mercedes SL roadsters for around $10,000. Today, they cost ten-times as much and the house we built for $30,000 is worth around $300,000 – in the current depressed real estate market. The point I am trying to make is you can’t keep up with the debasement of the dollar, over time unless you are brilliant and lucky – or own an investment that gains more, after taxes, than the loss of your purchasing power. How much do you need to earn to stay even?
Inflation is nearly 8% and rising. You need to make at least 8% after-tax to break even. You can’t do it in bonds, annuities, savings accounts or even in the Dow, which is around 15% BELOW its 2000 level. Gold and silver have been big winners for a decade. They have done better than merely hold their own.
I keep hearing from my “mainstream” friends (like Backwoods Jack) that gold was a losing proposition in the 80s and the 90s. They are correct. But that is no longer the case. Few investments have kept pace with gold and silver since 2001. These same “mainstream” investors now say “gold is over-priced” and they use that as an excuse not to buy any. I say, “There is none so blind as he who refuses to see.”
When they finally start to “get it”, they will find reasons to shun physical gold and silver and instead purchase a small amount of GLD or SLV. They are more comfortable with paper investments – the very things that they have been buying for decades. GLD and SLV are just another form of investing in dollars. Somewhere down the road, and it won’t be that many years ahead, the profit that they take out of their ETFs will not buy them the physical metals that will be on the top of everyone’s buy list. The holders of the metals will not sell them for “dollars”, or if they do, they will demand a very hefty premium above the quoted paper “spot” price.
Yesterday, our wholesaler told us that the CME group will be raising margins back up on Friday and again on Tuesday and again on Thursday. This will probably result in a depression in prices.
The big news this Monday was that they have lowered margin rates considerably in order to accommodate those who have positions frozen at MF global. This obviously led to much more buying on the market and a rise in price.
This all evens out over time – and will have no lasting affect on the price or on the bull market. If you believe as I do, that gold will hit $2,000 by year’s end, or shortly thereafter, it really is no big deal if you buy it at $1,790 or $1,725. When you start trying to pick the bottom you will end up doing nothing.
I can’t tell you how many people, over the last 30-years, have told me, “David, call me when gold falls to such-and-such a price and I will buy it then.” In every instance when I would call them back when their price target was reached, they would say, “I think it will fall further, so I am going to wait.” They are still waiting. Only a fool tries to pick a bottom. And when the price turns around and moves up, they inevitably say, “It’s too late, I missed it.” Don’t fall into that trap.