Posts Tagged ‘Timing’

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.

Silver Breakout in October?

The Element of Time
If the fundamentals of an investment are the rules of the road, then timing it is your depth perception. I firmly believe that just as the better the depth perception the better the driver, so too the better the timing on a trade the better the investor. Notice that timing in general, as well as trading, are speculative by nature.

Anything could happen at any moment but if one wishes to speculate, let him begin with timing as oppose to, say, a basket of worthless CDOs. This is what we’ve been attempting to do over time and this coming autumn is the real test.

We’ve been speculating for months now in a breakout above the resistance level of $15 for sometime in September. We have two instances in recent history, the first from the 2 secular trends and another from 2 cyclical trends.

A Secular Inference
In the 1970s we saw a situation quite similar with that of today. Stocks were making new highs, sentiment was good even though the economy was slowing, appetite for risk was high, commodities and inflation was on a rampage, being closely followed by interest rates while the precious metals were just tagging along with the asset boom.

[In that era, gold saw its value rise from a suppressed low of $35 an ounce to over $800. To put that into perspective it would be similar to gold advancing to an unadjusted $6400. Now realize that it doesn’t seem all that irrational considering that the Dow at the time was hovering just a bit above 800. Besides, news of gold manipulation in modern times wouldn’t surprise me the the least.]

This does tell us two things predominantly. One is that nothing, even gold and silver, moves in a straight line. There are many technical cycles within the fundamental cycle and even though all the fundamentals are strong or even getting stronger, each day’s trading may not express that.

Two, it seems that in place of the standard boom-bust companionship observed in financial issues, commodities and particularly precious metals work in a rather boom-consolidation phase. This is because goods are actually used in industry in addition to mere speculation. Entailed within, dealers and miners may need weeks or even months to de-hedge and accommodate new higher prices.

A Cyclical Inference
In this bull market alone we have seen the above paradigm displaying an interesting observation to those familiar with the industry. For instance there have been 3 major rallies since the bull market began. The first, similar to the 70s, was a mere blip. Prices soon fell back to their previous levels almost completely erasing any gains from “Irrationally Exuberant” 1997 until 2002. The next rally began in October 2003 and consolidated through to September 2005. It is interesting to note that all these rallies began their ascent in either September or October of their respective years.

Thus, it seems that silver and gold may be in a strikingly similar pattern. The rally that began in late 2005 was completed in May of last year and has been consolidating between 10 and 15 since. The past year and a half we have seen a number of technical indicators that seem favorable for a rally in the near future.

a) A sustained rally cannot occur amidst excessive optimism – this may explain why the 1997 was unfounded. We have seen the many investment banks, brokerages as well as the media lessen its overall hype on the Precious Metals.
b) Late in the consolidation stage speculators became either restless or even bearish on the potential for further profits. This obviously welcomes a wave of speculative momentum traders and funds into the arena pushing the metals higher and further than ever before. We see this.
c) Many Central Banks seem to wait around for higher prices for a while and then seeing no immediate recovery sell their ever more profitable gold to diversify into holdings of better return.
d) Many traders seek for trend lines and dig through technical analysis, candlestick charts and whatever have you to make every bit of profit off of a otherwise bland correction. It is when these trend lines have been broken as we have recently seen that these traders also abandon hope of immediately higher prices.

For those seeking resemblance from the previous precious metals boom see these two posts, Silver Ready to Spring and What’s going on in the PMs. Just look at the charts. It’s just important for the silver investor to realize that what we see this week may, pr may not, be the bottom of a consolidation channel – figuring that even when prices decline to the bottom in September it should be slightly higher.

Waiting for a Sale
Many analysts are now speculating or even eager for silver to break support in favor of lower prices around the $9-10 area. This is foolish for a number of reasons.

Primarily the catch is two-fold. If you are a fundamental analyst than why wait for $10 when we had $12.10 this past week. Trust me when the market rallies and silver hits the high double digits, the daily moves of $2-3 aren’t going to matter in the slightest. If you are a technical analyst than you are following the crowd. In the case where silver breaks below $9 will be met with such diverse opposition and support that it will almost be impossible to make an honestly unbiased trade.

Then let’s consider the possibilities. what if we don’t see $11 forever? The traders sitting on the sidelines will be toast and have hypothetically placed in a short sale, albeit psychologically, and will be forced to buy at much higher prices.

The second reason, is that you must consider that if so many technical analysts are awaiting lower prices, it may be that lack of demand influencing the selling has already been filtered into the market price.

The Dollar
Additionally, many buyers purchase gold and silver as a hedge against inflation and a falling dollar. This being the case, these hoards will not be sold quickly, thus creating an almost concrete support under the market price – which may not be as low as many expect.

The Rally
Many traders fail to consider the degree of aptitude in these rallies. For instance in 1997 no one would have guessed that the mysterious strength in silver was due to buying from one of the largest investment firms on the planet – Berkshire Hathaway, run by none other than Warren Buffett. In the subsequent rallies we also saw buying from major funds of such stature. Likewise, in the coming rally no one can be sure who will be buying, Buffett, China, Blackstone for all I know? But one thing is for certain. You will find out after they have bought not before or during.

Once again, much of the above is random guesswork. It will be interesting to see of the metals break out above their previous – and soon all-time – highs by years end.

If you are interested in trading the metals look out for strong buying the next rally may be underway. Watch for: signs of a weaker Dollar, excessive pessimism, change in monetary policy, institutional buying, or any major catalyst such as a hedge fund blowup or terrorist attack.

If you are an investor and have already cashed in your profits from the credit boom stand by as it unravels in ways you can’t possibly imagine. Trust me when I say Bear Sterns was just the beginning. The coming debacle may possibly make Enron look like a walk in the park.

When the average Joe Boxer begins believing everything Mike Shedlock and Jim Rogers say, take the time to consider your bond portfolio.

“Sell High, Buy Low”

We’ve all heard the “Buy Low, Sell High” mantra, but what about selling when things look frothy with optimism and awaiting a better buying opportunity in the future. When this comes to mind there are two very important questions one must consider.

1. Am I really smarter than the market? Many traders and speculators follow trends and technical analysis to dictate their trading. The problem with this is simply that the markets don’t usually move in tandem with the charts. As a matter of fact the largest moves, be them up or down, are usually when many investors are out sitting on the sidelines for a better buying or selling opportunity. I don’t have a good chart to prove this to you (funny that its not often that traders boast their records of chart predicting), but consider how many investors were ready for the 9/11 attacks, the Oil Embargo in the 70s or the breakout of a World War.

2. How much will I gain by doing so? This boils down to a very simple equation of numbers. Will I end up with more or less than I started with. Although this may seem quite obvious in the beginning, considering that one is truly selling high and buying back low, it is nevertheless of extreme importance to account for accuracy (if you know someone who has timed both a top and its bottom I’d love to meet them), Spread between the Bid and Ask (you will usually buy slightly above the price and sell slightly lower and, of course, one must configure trading costs, commissions and taxes.

Here’s a simple equation to figuring all this out:

Ne = Nb x (Pb/Pe) x A² x S²

Ne – The number of issues at the beginning of the trade
Nb – The number of issues at the end of the trade
Pb – Price at the beginning, before selling
Pe – Price at the end, before buying again
A – Accuracy (5% accuracy would be .95)
S – Spread (a 2% premium would be .98)
2 – These numbers are squared for both trades
Trading costs and taxes must then be configured, as well as commissions if necessary.

The complete article can be found here.


Timing Silver

Being that I am more bullish on silver than gold, I have bought more often, created a wide series of interesting calls that I found quite interesting in hind sight.
First Silver Purchase
As Gold was inching up on its highs, Silver was doing much of the same. Silver topped out at $15, a level yet to be challenged. I made my first purchase two months after gold on August 6th. Silver was trending up. This was most definitely after I had been influenced that silver had far greater potential than gold had. Nonetheless it is also obvious that I had bent to the pressure of the crowd. Although I hadn’t bought in at a top, something I have become quite good at calling and avoiding (as you can see), I had not bought anywhere close to a bottom.

Lesson #4: This is probably the strongest lesson I have ever learned. When a rally occurs, a sell-off will follow. If you’re so late that you can already see the rally, Don’t Buy In!

Silver Purchases 2 and 3 Seeing the above mentioned I realized quickly that a greater buying opportunity was in the making. As we mentioned in the previous article gold and silver sold off sharply in mid-September. I bought heavy. Although this was a absolute bottom for gold it was not so for silver. A bottom since then nevertheless. A Month later I made another similar buy at about the same price.

Lesson #5: The sell-off that follows is usually as great as the rally that proceeded it. Look at these sell-offs as phenomenal buying opportunities.

Silver Purchases 3, 4 and 5 I always had trouble rationalizing this one. I had bought well (at levels that have yet to be questioned as solid purchases) but at the same time I was buying into a rally. I have stayed content with my decision convinced that my inner conscious told me that anything under $12.50 was a pure bargain. (I still feel this way). As the September-November rally grew heavy I stopped buying as you can see.

Lesson #6: Follow your first instincts. They are usually correct. If your a contrarian but something else (general sentiment, fundamentals) is still telling you that you have a real bargain, go ahead and do it. I would have rather seen silver plummet back to $11 than see myself miss the opportunity entirely.

Silver Purchase 6, 7 and 8 These were all during falling prices and after I had properly called topping in silver prices. A bit more patience would have saved me a few dollars, but when playing with so few dollars and limited supply (not every coin dealer always has silver bars available) I took what I could get.

Lesson #7: Patience still would have saved me quite a bit. If you are in a position where you have no worries about where your silver will come from and you feel that prices may be heading lower, they probably are.

So where are prices heading now?
Yesterday I posted a piece on three possible scenarios. In a way I feel they are all true albeit at different times. Looking back at a chart from the 1970s – the last time we saw a boom in precious metals (and interestingly enough also due to booming inflation and a credit crunch) – I noticed that the way many perceive the overall trend is not how it occurs.

There were a series of booms and sell-offs, some that completely erased the previous gains. Thus it would seem possible for even the most disciplined long-term investors to trade in and out of the metal due to high increases in interest and attention.

Look at the follwing chart showing the price movements in silver from 1971 to 1977.

Also bear in mind that these gains were nothing compared to the explosion in price that would occur just 3 years later. Silver hung around $5 an oz. idly for years before compounding 10 times to almost $50 in 1980. Do realize that the long-term trader would not have seen any significant loss from late 1971 all the way till mid-1974, where prices only stabilized and stayed above $4.

What is also interesting is the similarity to todays markets and the movement we’ve seen over the past 7 years.

Let me show you that again…

1970s 2000s

Will silver now trend the $13 line or does it have more room to go? I’m not sure but one thing seems certain as history shows it – There will be some stagnation in the silver price at some point, and it may last a few years. But when the boom does comes very few will have had either the patience and silver in hand to be ready for it.


Timing Gold

I’m no Technical Analyst. But when buying gold and silver it’s not just good enough to know what to buy, but also when.

I made a set of chart showing all of my gold and silver purchases in the past year and tried figuring where I made some timing mistakes, where I bought too early or waited too long and how I could improve my buying in the future.

They say a great investor only makes a few purchases throughout his entire life. Warren Buffett says that at the most 20 trade orders should be given. Imagine you had a punch card that only allowed 20 trades. You can either buy and hold 20 issues or buy and sell 10 times. This follows the first strategy of buying big at a bottom. In this case the investor is making a long-term purchase he feels is a value buy. Thus he doesn’t mind if it fluctuates a few dollars lower.

The second startegy is by doing something we call “Dollar Cost Averaging”. You buy in at various times eventually averaging your cost. This is also very beneficial for those long-term investors who are not that familiar with calling proper bottoms. It also benefits the individual who is still earning a living and saving that money in the form on an investment.

Before I buy I usually check for two things. I’ll first look at the general sentiment. I remember watching gold knocking up $10+ days as it was within close range of its all-time high. Naturally and quite frankly I wasn’t the only one watching. Just about every analyst on The Street (no pun intended) was talking about it. My thought? Bad time to buy.

The second thing I often check is for a second opinion – the Technical Analysts. These have been of much help in the past. When you’re biased towards buying in, it often pays to hear what the analysts have to say. You’d be surprised.

First Gold Purchase
After $710 gold I waited. Of course things quieted down and quick. I made my first Gold purchase in June 9th. Gold was in a free fall and I felt it was safe to get in. Considering the past 8 months I pretty much bought at average. I heard analysts saying that Gold was heading to $550 (it touched $560 in October, an absolute bottom I ended up calling).

Lesson #1: Patience… Would I have waited just another two weeks until the hype had cooled entirely I would have made a fine purchase.

Gold Purchase #2
Late September and Gold had been trending down, from its rally to $660, for 3 months. I saw an extremely low sentiment now that the all-time high attempt had failed twice and a good dose of investors had gone cold trying to secure a profit. Then came a down day. I remember seeing the prices of gold and Silver plummet 8% along with every bit of confidence investors had stood with till then. I called the Bottom and loaded up on the Metals.

Lesson #2: Patience Pays! I had waited and I was paid in full for my waiting. Will we ever see Gold at $560 an ounce again? For that we must wait and see.

Gold Purchase #3
About a month later I made another purchase this time in a quarter ounce sovereign. My timing was right but what I hadn’t realized was that I had purchased the coin at a 30% selling premium that is not paid when sold back to the coin dealer. I soon sold (at a loss) when I recognized that the difference in silver would be far more profitable than holding. I closed with a 25% loss).

Lesson #3: And a good one… Buy what you know. Many traders and investors try buying things they barely understand. I made that mistake and paid a hefty price.