Monday, December 17, 2012


I knew if I titled this post this way all the cult members would come in here to kick my ass, welcome culties!

As I ponder the big picture view of everything that is going on, I do get very worried about what I feel is an inevitable crash in the markets that is going to come at some point. I do think it is going to be worse than the 2008 financial crisis and the reason I think that is that all the tools to slow something like that down, are being used now to try and prevent it. If it were to start again there would be limited ability for the PPT to intervene short of just closing the exchanges. Even that is not going to work because the problems are not at the stock exchanges. We have built a situation that is not sustainable by running up debts to a level never before seen and growing out of this is not going to work. Borrowing more and more and spending more and more is just a plan for idiots. Penalizing all the job creators by taking their money and re-distributing it to people who don't create anything is also not going to work.

This leaves us with the inevitable conclusion that something has to give. I read over the weekend that in Oakland, California police have had to cut back and have posted the crimes they are not going to respond to. I am sure this was a negotiating ploy by the union to try and avoid cut backs, we know unions could care less about anyone else other than themselves, so why not just tell all the burglers they are not going to respond to burglaries among other things. If I was a burgler that is where I would move and I would send a telegram to the police commissioner thanking him for the freebie. I point this out because I think the average person does not think enough outside the box. Most people assume these types of protections will always be there, but what if they are not do you have a plan? If you had a burgler in your house with a gun, how would you feel if you knew the police would not come even if you called them?

All of this dovetails into the discussion on GOLD, the worlds favorite topic. It is almost like the Yankees now fans are zealots and opponents hate it and pull for losses. I am in between on this. I could care less if it rises or falls I just look at it from a trading perspective. My bigger picture view has been for the last 2 years that it is a bubble ready to pop. Culties were furious with me for this take and sent me all sorts of emails with cute little newly found formulas as to why it has to go to $10,000. They argued that in 1903 only 3 people in Nova Scotia owned it and now only 4 do so the sentiment is still bearish etc...Folks you might be right nobody knows the future with precise certainty and that includes me.

The chart at the top of the screen is a long term view of GOLD with standard deviation bands on it. If I set aside all arguments on both sides and just look at this chart here are my observations.

When I am looking for something to have a big price run I look for two scenarios:

1) Something tremendously undervalued from a fundamental perspective. This can either be just price as an absolute or it's value relative to something else. In this case that condition existed in the late 90's. We pierced the 3 standard deviation band on the down side which marked the basic low of the whole decline from the 80's. This made sense. It was also very undervalued in relation to many other things at that time.
2) The second scenario is we have had a good trend and a nice pullback to it and in that trend ADX has stayed > 30 < 60. In this case we have gone way beyond 60 on the high side so it does not qualify for this condition.

At this point neither of these conditions are met.

Once I have looked at these two things I step back and think about the situation at hand. Is there some unusual event taking or likely to take place that could impact this situation? If there is does that event have any identifiable cause and effect relationship that has been consistent. If so that can play into the two above scenarios. I will admit as I ponder what I am fairly sure is coming at some point, I want to be as prepared as I can be and if that means owning Gold than that is what I should do.

The assertions along this line of thinking is that it is a "store of value," HMMMM...... Does storing something mean the value always rises? I can store an old Chevy but that does not mean it's value will rise. There is no precedent in history anywhere for this argument, so that is an easy one to discard. Gold has not always held it's value.

We are printing money like drunken sailors and that is going to create a huge wave of inflation. This argument has some merit and if there is one thing that has correlated with Gold it has been inflation. If we get runaway inflation it does make sense that Gold should increase in value along with everything else. That is the key, EVERYTHING ELSE. If this inflation that is being talked about comes around the corner and it may well, everything including a loaf of bread is going to sky rocket in price.

So it does appear there is one thing on the checklist that could call for owning some Gold, the inflation risk. The question is whether Gold would be the right asset to own in that instance versus anything else? There are no conclusive arguments on this to review, it is a judgement call.

However, if we go back and look at the chart you will be able to see why I stand where I stand on this at the moment. I was looking at houses back in 2007 after having sold out my Newport Beach home in the fall of 2005 and I went up to the Santa Barbara/Carpinteria area. I found the people I thought from my research were the best Realtors and started talking to them. I explained to them after I looked at some places that I thought prices could come down about 50%. At this time prices had just begun to come down. Of course they were aghast at how anyone could think that even after I told them what I did for a living. I wish I could find the chart I sent them but it is stuck on some old hard drive somewhere. I had created a chart with some real estate metrics and standard deviations of them that looked basically identical to this chart at the top of the post. Aside from any opinions the numbers just told me we were very over due for a significant price reversion. I just threw in 50% as a guess which turned out to be about right, that was lucky. It was not lucky to predict a reversion. I feel the same way looking at that chart.

When I look at it I see a market tremendously over extended in price. History is full of patterns like this in commodity markets. What history is not full of is charts like that which kept going at the same rate for many more years. There are absolutely no charts that show that, not a single market has ever done that EVER. This is why I am not super bullish long term on Gold. It is pretty simple and may be wrong, but that is my logic. It does look to me in the near term Gold is setup for a rally.

I think the chart of Apple below looks just like Gold and we are seeing the unraveling of this stock right now as well.

We took a couple of shots on the short side in the markets this week and the move down in the indexes which was brief, has turned out to be a fake/trap on the down side after it was a short term trap on the up side. It has been pretty choppy and trying to catch a trend move has not been easy to do lately.

Good Trading


wojtek said...

how do you measure the value of anything? usually people use some external and stable reference. What would you suggest to use as such reference point?

Bobtek said...

to measure something you need some reference point. what would you use to measure change of value?

Chris Johnston said...

other markets

www.donovanac.com said...

Been telling people to read martin's armstrongs work on gold and the markets. a close under 16880 means a test of 16440 at a minimum. if we get a weekly close under 16440 then 15880 comes into play.

Next buy point for gold is march april 2013 whether that is a test of support or a break out

sergio said...

You could be right, did you gold short today?

Joel Donovan said...

i have been short the GDX for a long time now close to a year