The Moment of Truth

I deem the next 30 days as integral to my credence as an investment analyst. I guess its my conscious mind reminding my rational mind that everyone has their biases. How does one rationalize reality? Even if his orientation has been correct in the past, on what basis may he ensure that the analysis he has based his prediction upon, as well as the ramifications by which they transpired, will endure?

Nevertheless, sound analysis may only be inferred by the events of the past. Any future development may only be predicted by the laws and facts of yesterday, and not by the theories and speculations of tomorrow. With this in mind we have set out on our investment strategies, in attempt to discover not if our ideas are plausible, but rather if the preconceived notions by which we base our logic are adequate for further study, or if they have been compromised by invalid calculations and must be corrected before research may be continued.

Our primary choice of investment is currently in the precious metals sector. Much of the reasoning on the matter has been explained at length in previous articles.

Because we relate to the investor who continues to accumulate holdings by means of dollar-cost averaging, it is therefore important to regard as to when buying should discontinue. Just as in a stock the value-oriented investor may stop buying as his margin of safety, so too with regard to commodities must the investor slow or even halt his purchases in the event he feels his downside has increased substantially.

With this prelude, we feel that September is an important time frame in the precious metals sector, not in the sense of increased speculation, but rather with the intent of a buying deadline. This is due to the fact that the month has shown to be a fundamentally strong buying season.

[While this may seem similar to the crazed “January Effect” that has long withered due to public attention, it should be considered that public interest remains minimal and should not conflict with the intense buying spree occurring from South Asian countries this time of year.]

Additionally, it seems that many investing interests have subsided since the large decline in July of 2006. Since then much has transpired, as mines have commenced large de-hedging operations, central banks have sold off additional reserves, and the common investor has lost interest during the long and essentially boring consolidation stage. While many analysts have called for $1000 gold, this has not yet occurred and instead many technical funds have stood to profit from the period of increased market volatility.

Many potential buyers, have eyed September as a catalyst for a massive buying explosion. The rally will most likely emulate a standard trend, taking place in 3 stages: Denial, Migration and Euphoria.

Denial: As value investors continue to increase their holdings, buying will increase to resistance of $715 (we refer to gold), many analysts will doubt the rally has any real significance.

Migration: As a breakout occurs, institutions and growth investors will run with it, extending the sector to its largest gains, probably well past $1000.

Euphoria: As gold dazzles the masses, the speculators will arrive, this will culminate as the media too begins to applaud the rally’s strength, presumably sometime in June 2008.

The fundamentals remain in check, and reasons for the rally only continue to build. It should also be considered that stocks by contrast have historically had some tough sailing through the fall months. Gold may also emerge triumphant if the cycle turns “deflationary” and gold holds its value while stocks take a hit, on what’s inversely often the weakest months for equities.

The question of whether or not gold will rise or fall in such a scenario remains in the territory of the U.S. Dollar.

Time will tell, and that time is upon us.

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