“Boom Bust ain’t it great to be crazy!”
Here’s how sentiment works. There are two levels. We’ll call them above sea level and below sea level. All financial assets trade in these two levels, constantly in motion. When a trend is up or down it can fall into any of these two. These evaluation depend on whether or not an issue is considered cheap or expensive. Many different factors decide this. These are generally driven by fundamentals although they usually carry out into the extremes.

Here’s the problem with sentiment. We try to follow the world renown “Buy Low, Sell High” mantra of investing. However, to do this successfully means that one must buy when the masses are selling and sell when the masses are buying. In other words buy when times are bad and sell when times are good. When we think about this for a moment we begin to realize how hard this is.

The catch is that you’re always considered the fool! Of course this is only until you have an outperforming portfolio that you can brag about and the smile when someone asks what your buying cause you know they won’t listen. They’ll ask stupid unrelated questions like – “what’s your proof?”, “How much is it up so far?”, “How much money did you make?”. As the Motley Fool so eloquently puts it – Be a Fool!

But as a registered “Fool” you still have to be right. Nothing differentiates the losers from the winners other than the future. The loser and the winner alike both advocate their lots claiming to be successful in their assumptions.

So how do you know when your right? You don’t have to. Just follow the fundamentals. I read a rather interesting article over the weekend explaining how, after much research, analyst Mark Hulbert found that many funds would have done much better holding onto their initial ideas and assumptions. This means that they ended up selling their winners – capping growth – instead of letting the winners run. “Better to Sit and Do Nothing”. (Those who read our previous articles about Jesse Livermore know this).

This lesson was also taught to Warren Buffett early in his trading career, at the age of 11 actually, when he bought his first stock in the 30s and sold it in the 40s for a handsome gain. The stock however went on to rally to over 200 in the next few months. Don’t cut your winners… unless of course the reason you bought the stock, the fundamentals, no longer exist.

Why the whole intro? Because we must learn to identify between issues that are falling and issues that are “correcting”. A correction – a short term down slope – happens all the time. They are there because buyers and sellers are constantly trying to find the best price. Problem is that sellers often sell for too low and buyers tend to end up buying for too high.

Lessons Applied
I see gold going much higher in the coming years. Much higher. Not because I’m a gold bug or a permabear, but because of the fundamentals driving it. Gold is bought for one reason and that reason is what we’ve been writing about all these months: Caution!

Gold stands for ultimate safety and is acquired heavily when the markets become blurred by over speculation and confusion. It is hoarded when trillions of dollars of wealth is being transfered at enormous speeds. We saw this immediately after the peak in stocks in late 1999 when gold jump started a rally that has lasted for years. We don’t by any means see this rally ending anytime soon and as a matter we’ve seen it get worse. Gold is the bunker that saves you during the storm whenever it hits, guarding from everything from inflation, currency disruption, stock market declines, housing busts and even geopolitical tension. We can’t promise any of the above will occur but we do know the first rules of making money.

Rule #1. Don’t lose money. Rule #2. Don’t forget rule #1.

Thus Gold, IMHO, is headed to somewhere near $900 an ounce in the future. Let’s just say by September this year. (although many think it may be sooner). We nevertheless see a small correction coming our way as well. So for the record we called this one! The trend seems to be advocating a decline to the about the 595 area, as seen in the chart below. We then say “BUY, BUY, BUY!”. Everyone will think were nuts. (This is a good thing if you remember). Gold will then stand a rally that should catch all of Wall Street with their pants down, blowing shorts (pun intended) out of the water and gold bears off their saddles of skepticisms and central bankers away with their market controlling schemes.

A probable down phase leading to a phenomenal rally is seen in the cards.

$900 gold and here’s the fun part. We will probably then say “Sell something and take some profits, markets are overbought and we expect a correction”. They think we’re all crazy, we made money, we still own gold and life goes on.

Although silver is known as “the poor man’s gold” it nonetheless also requires an iron stomache. Many call it the metal with ADHD. But it’s gains for those that wish to hold on tight can be much more rewarding. We remain bullish on all precious metals.


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