Graceland Updates 4am-7am
April 10, 2012

1. If Warren Buffett was a member of the gold community, would he book losses on his gold stocks now and exit the market?

2. I'll suggest that he would be a buyer, not a bailer, and he would be anticipating an enormous rally.

3. Marking some of the OTC derivatives debt to model has created the illusion that the size of this debt has shrunk. I don't think much of the OTC derivatives problem has really been solved, and the story of the OTCDs is really now the story of the invisible man.

4. Or is the story better termed the invisible bomb?

5. After buying American government debt by the boatload, and then bailing on a lot of it, the Chinese government is now apparently sinking its teeth into Japanese government debt. The definition of insanity is to repeat the same behaviour in a similar situation and expect a different outcome. Japan is arguably in worse shape than America, and I doubt the outcome for China will be any different than it was with their American bond-buying expedition. It will fail.

6. The global mountain of debt that created an enormous bear market in all paper currencies has not shrunk while GDX has sold off. It has grown. Unfortunately, drawdowns in the price of most gold stocks have caused irrational loss-booking by most investors.

7. I don't believe it's possible to approach markets in the manner they were approached by most investors in the late 1990s. I think it's a myth that you can engage in sector rotation throughout your life and end up in a profitable position. That approach failed then, and it will fail now.

8. There is a role for sector rotation, but I believe asset accumulation is the main tactic that you must employ to build wealth. Gold bullion is the ultimate asset, but gold stocks are also good assets to own. Sector rotation should be used to tweak your accumulation of gold stock assets.

9. Don't wag your asset accumulation dog with a sector rotation tail, or you'll only go from the fry pan into the blast furnace.

10. Warren Buffett turns on his stereo and plays classical music when the market crashes. He waltzes around the room as his holdings draw down hard. If Warren thinks the market "might fall down", he doesn't bail on his holdings.

11. I'll dare to suggest that far too much testosterone exists in the gold community. You may want to consider replacing your market timing program on steroids with Warren Buffett's stereo.

12. In the market, the use of leverage is like the use of steroids in the gym. Leverage, like steroids, comes in many forms. It's not just borrowed funds. For example, investors own gold stocks to leverage the price of gold.

13. Concentration of enormous risk capital in a single price area is also a form of leverage, and it is the single biggest reason why gold stock investors are generally unhappy now.

14. I would guess that the average investor probably has about 3-10 times more risk capital invested in the market than they can handle emotionally. Speaking personally, am I concerned that GDX, GDXJ and individual gold stocks could fall a lot lower from here? Yes.

15. Am I concerned enough to sell anything? No. Quite the opposite is the case. My only thought is whether my next buy order at $45 for GDX gets filled, and next one, and the next one.

16. The gold community thinks they have "gold stock problems". Here's a super-sized wake-up call for those that need it; in 1998, while the general stock market soared, Warren Buffett's Berkshire Hathaway stock fell by about 50%! Did he bail? No!

17. Please click here now. You can see that during the greatest stock mania of the 20th century, Warren had to endure a horrific meltdown in the price of his stock.

18. Now, please click here. That chart shows the performance of Warren's Berkshire Hathaway stock against the Dow during the same timeframe. It's a chart of horrors, but Warren took the pain and emerged in the honey pot zone.

19. I remember that time well, because I was a broker, and I had supposedly rational business owner clients demand to liquidate their Berkshire holdings at huge losses. I followed their instructions while shaking my head. Please don't make the same mistakes they did then with your gold stocks now.

20. Please click here now. Note point "A". When GDXJ burst over that green supply line earlier this year, I warned that price could fall to the $22-$23 area without changing the bullish picture.

21. Well, that's where we are now, and the bullish gold stocks picture is unchanged. Hopefully, the music playing on the stereo you borrowed from Warren Buffett is also unchanged.

22. It's too early to make generalizations about Friday's jobs report "accident", other than to say it is very strange that so many private polls had their numbers so far off from the government numbers. Institutional money managers will carefully watch the economic reports that are released this week, to see if the jobs report represents a change in trend, or whether it was just an "aberration".

23. Please click here now. The gold price is quietly chewing through one minor overhead resistance point at a time, since bottoming in the $1615 area. Now, please click here now. Floor traders in the gold market have a belief that "all gaps are filled". I would suggest that all weak gaps in price are filled. That gap was created by a stunning jobs report, but it will require additional weak economic data to make it a gap with power. Wait for the data, rather than predicting it. The low for gold is likely in, but that doesn't mean that gap can't get filled or price can't meander in this general area for many more weeks.

24. The man's name is Warren Buffett. Not Warren Buffoon. Learn it well!

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Cheers
St