REVISITING A SORE SUBJECT

Richard Russell: Forget everything you've heard about a gold bubble

Thursday, January 13, 2011

From Richard Russell in Dow Theory Letters:


Question: Russell, what do you make of all the talk about gold being in a bubble?


Answer: I've seen a number of bubbles in my life, and they have all been associated with huge and frenzied participation by the public. Think of the tech bubble, the housing bubble, every bubble was characterized by broad and frantic public participation.


Who do you know owns gold or has any gold stocks or ETFs today? Ask 20 people at an investment conference whether they have participated in the gold bull market, and you will be shocked at how few have entered the great gold bull market.


So if gold is in a bubble, it's a bubble in the minds of those who have completely missed the gold bull market. Public participation in the gold bull market has, so far, been unbelievably thin in the US. If gold is in a bubble, it's a bubble unlike any that I have ever seen before.

I had this forwarded to me by someone last night. It is an excerpt from a known prognosticator and after reading this please look at the chart below and tell me if you think this assessment is accurate?

I realize this chart is a mess with all the arrows. The RED line represents the COMMERCIAL players and the GREEN line the SMALL SPECULATORS ( the investors he says have not participated in this rally ). Maybe I am just a dumbkopf, but what jumps out at me just in looking at this chart is that every time the price rises substantially, the SMALL SPECULATOR longs increase right along with it and the COMMERCIAL longs decrease right along with it. You can see in 2009 specifically, the entire years rally was completely driven by small traders the ones he says have not participated! This was my whole basis for being overall bearish on this market and wrong. If you study this data over many markets and going back in time many years, you will find that this is highly unusual for small traders to be able to push a rally this far for this long. This is one of the problems with fundamental data, at times it is just so early you can get wiped out looking for turns that should happen that don't, or take years to develop.

How you synthesize anecdotal evidence like he references above is very subjective. I would argue the anecdotal evidence is off the charts bullish. How many TV commercials are there telling us all to buy gold? A helluva lot more than said to buy Real Estate at the peak. From G Gordon Liddy, to Dr Laura, to Sean Hannity, the whole world is telling us all to buy GOLD. I have been asked by 9 year old kids how much Silver I have bought. All of this is my experience and his is different, so it just depends on how you look at it.

Here is the bottom line at this point. The market is in a solid uptrend in spite of all of this, and that is what matters. If this is a bubble, when it breaks it will be the shot heard round the world because you will have a $100 down day in GOLD and probably $2 or $3 in Silver. That will be the warning that things have changed. As you can see from the chart above, the Commercials are buying this dip we are having now as we are into weekly support levels, so I think we are at a short term buy spot potentially. I would wait for the price to resume back upward before getting in because we could free fall here for a time. My short term indicators are not giving me buy signals, in fact I did short Silver last week but am out of that trade now. I managed that trade terribly so I am not going to get into details on that.

The next chart is that of COPPER and look at the incredibly bullish SMALL SPEC position in this market, this is an all time high. Once again numeric evidence, not my opinion, that the small investors are pushing this market.

You should not run out and short this just because of this condition, it is just something to be aware of that this is beyond being on fumes.

As I look at one market after another we see similar situations to this. Since historically these have been very good gauges of when to look for market turns the following thought has occurred to me. What may have changed that is making so many things that have worked for decades now be totally ineffective? The possible red herring is of course our good friends in the government. What if they are classifying their activities to inflate everything in the small spec category? They should fall into the large spec classification. Wouldn't that  explain alot of this? Since the sheer numbers involved here make no sense, I really have no idea. At the moment unfortunately the best answer is it is truly different this time.  For my purposes whether these markets keep rallying or not is irrelevant since I do not hold things for years at a time anyway. I just try and point out what has historically given us indications of price turns coming.

These conditions are easier to use buying when commercials buy on declines in an uptrend then to sell short when they are fighting the trend like in the above charts. In other words, when their activity supports the overall trend, it is best to trade in that direction.