LINE IN THE SAND

I have talked about this market (Silver) and Gold, until I was as blue in the face as my left hand is right now. The above chart says it all. Basic chart analysis 101 says when you get a fourth attempt at a bottom, price goes through it. The target and most likely destination becomes the lows over to the left. If you are still a bull, this would certainly be a great place to buy. Your risk on the trade is very small, and if you are right and this does happen to hold, you could have a monster trade on your hands.

The support and resistance approaches to trading are challenging. When you draw Fib numbers on a chart you create something that looks like what Galileo's maps probably looked like. Eventually something will happen at one of the lines, but which one? You can see the prior time we went down to this level and formed the third low ( triple bottom ), we got a great bounce from that. However, now we have gone back down again to that level.

It gives me no great joy to see this and to be able to say I told you so, many people are being wiped out by this just like they were in real estate, and internet stocks. What is important is to learn from bubbles because they do provide tremendous opportunity in both directions. The take away from this should be that whenever an asset class starts following the playbook I outlined about a week ago, get the .... out and be thankful for the windfall. Whether you consider going the other way with it once you get out is another matter. Timing bubbles bursting is very very difficult to do. However, it is very easy to spot them inflating. If you get out early but still make a big profit so what?

This is actually one good thing governments do for all of us. When they manipulate prices upward, it gives us all a free ride for a period of time. Do not get caught up in whether or not they should or should not be doing it. They do it and there is nothing we can do about it so why not take advantage of it? There will be another huge metals run in another 10 to 20 years, so just keep that in mind, the big ride now is down most likely. Catch the train if you can. I know we have already dropped by about 50% off the highs but we are probably going another 50% from here.

The other market that the bubble denial crowd in the metals points fingers at is Bonds.

A couple of things here. First, the rise has been much more orderly here contrasted with Silver above. We only have a couple of months right in the middle where there was frenetic type of action. However, the second point is much more important. There is a long and direct correlation historically between this market and economic conditions. It has been as consistent as any such relationship there is. The reason should be obvious, the cost of money via interest rates, does control the flow of money in and out of things. Rates create the flows. The alleged relationship in the metals does not exist consistently over time. The reason it does not is that they are commodity markets. They are not directly tied to economies.

It is true we have had a huge run up driven by governments likely manipulating the price of metals upward. However, if you look through time you will not see this relationship have any consistency at all. It is the flaw in the ointment for Gold Bugs. They allege something that sounds reasonable, yet it has no history. In the case of Bonds, as long as the US Economy stays weak, this market will stay strong. This is a fundamental relationship that has always existed, and still does. These are completely different scenarios. What I think not enough people are considering is that we may well have entered a Japan type of situation where we have deflation pressures that will go on for 10 to 20 years. If that is the case, rates will stay this low during that whole time just like they have there.

Forget the guy at the water cooler with the knit tie that is shy of a first down ( is not long enough to get to his belt buckle ), who has that Cal Berkeley or Harvard degree and seems smart. He does not know what happens in the real world. He is a paper champion. Yes he thinks Gold will rise and Bonds will fall. Give him a comb so he can straighten out his tossled hair ( they all seem to have that look ), then kick him to the curb.

Have a good weekend