The past month has been a profitable and rewarding one for gold and gold stock investors. As we've continually pointed out since June, the waves of upward momentum, not to mention the seasonal trends, have been favorable for rising gold stock pries. The yellow metal has even exceeded expectations by shooting well beyond the psychological $500 benchmark in December. And the XAU gold/silver index made a fresh new high for the year last week.
The strength of gold seems to have the pundits tongue-tied for an explanation for its astounding strength. The gold bears have been positively at a loss to describe what is happening in the previous metals arena. What surprises me, though, is the number of die-hard gold stock fans and long-term gold bulls who, for whatever reason, failed to participate in this latest rally. Evidently the old Wall Street saying, "the trend is your friend," has been forgotten by both sides.
The question that everyone seems obsessed with is, "Why is gold rising when the dollar is also near a high and inflation is tame?" The answers given by financial pundits in the mainstream press are varied and no one agrees what the true answer is. A recent article in the Washington Post seemed to hit the nail on the head: "Gold's New Luster Puzzles Traders." Might I suggest that the proper response (from an investor's standpoint) to this question is as simple as it is straight-forward: Who cares?
At the end of the day, does it really matter what the "reason" is for the rising gold price? There are so many thousand fundamental factors that influence the gold market that it would be impossible for any one person, regardless of intelligence or contacts, to be able to ascertain them all. This is one of the fundamental flaws of so-called "fundamental analysis." As a Nobel Peace price winner in mathematics once proved, having as few as three variables can make prediction (based on the variables alone) extremely difficult. And having more than three variables can make predictions based on the fundamentals virtually impossible.
Richard Bernstein of Merrill Lynch said it best recently when he pointed out the surge in gold prices is not based on fundamentals of supply and demand. He told the Washington Post, "People have to remember that the number one player in all commodities right now is hedge funds. It's all speculation..."
Investors also tend to forget that gold, like anything else that is actively traded in the markets, is a commodity. That means its value is variable according to the whims of the marketplace. It also means that its price is mainly influenced by intangible elements beyond the recognition of most investors. That's just another way of saying that manipulation by insiders, market makers and commercial interests is the primary determinant of any price trend, including gold.
Yes manipulation, the dreaded "M" word. Although it's fashionable to think of market manipulation as being a recent phenomenon brought about by the Federal Reserve and international financiers, manipulation is actually as old as the world's oldest financial exchanges. Every bull and bear market since the beginning of financial markets has been the product of manipulation. Without the influence of market manipulators, there would be no price trends, but instead a series of erratic and non-discernable wiggles of mostly sideways movement. (To get an idea of what a market without manipulators and specultaors looks like, check out a chart of some major commodities before the advent of the financial exchanges. Or better yet, look at graph of a 1-cent, inactively traded "penny" stock).
Manipulation has created every asset mania and financial bubble in memory by commoditizing those assets and engineering trends to the point where they engulf everyone one in the seemingly unstoppable upward trend. The bear market that inevitably follows such manias is likewise the product of manipulation designed to strip the mainstream mania participant of his newfound gains before the bubble (eventually) begins all over again.
Would anyone believe there was a time centuries ago when tulip bulbs were bid up to astronomical heights and in so doing engendered a financial mania which rivaled that of the Internet stock mania of the 1990s? How do you think tulip bulbs were assigned such extraordinary values? By market manipulators and commercial interests, of course. (Charles Kindleberger in his book "Manias, Panics, and Crashes," observes that the "manifold rise in price" of the more exotic tulip varieties during the 17th century Tulip Mania were rationalized by many observers based on "fundamental" considerations of the tulips themselves. Has anything changed since then?)
Would anyone believe that there was also a time in some cultures when seashells were used as a medium of exchange, i.e., money? (How does one succeed in getting people to accept shells in exchange for products and services? Through the clever use of propaganda coupled with skillful manipulation -- the same as with any money market.)
The rising gold price trend is not necessarily a response to inflation pressures, or fear of impending economic collapse, or demand by the new-found prosperity of Asian countries. Gold's price is rising for no other reason than that the manipulators in control of the gold market want it to be so, and for reasons (assuming there are any) that we'll probably never know. In much the same way that a Beanie Baby bubble was created in the late ‘90s, along with an Internet stock craze, the gold price is behind pushed higher by those in control of the market. And in some cases for no other reason than that "they can."
This is not to suggest that manipulators are your friends. Far be it. But the trends created by manipulation can be recognized by outsiders such as you and me without undue effort using some very basic investment tools. Moving averages and trend lines for starters. I've used the simple 30/60/90-day moving average series to stay on the long side of the gold and gold stock price trend ever since these moving averages turned up months ago. Others prefer the more widely followed 50-day and 200-day moving averages. I've found in the weekly chart it's best to use the 10/20/30-week MA combo.
When these moving averages turn up and harmonize on the upside (with the shortest moving average on top and the longest MA on the bottom) then you have a confirmed uptrend that usually persists long enough for money to be made on it. When the longest of the three moving averages is violated on a closing basis, you have an alert signal that possibly the trend is ending, or at least is in the process of "correcting" itself of built-up excesses that must be shed before it can continue. Thus your basic moving averages can serve in both a trend recognition and turning point identifier capacity. (It's not always this simplistic from a short-term standpoint as there are shorter duration moving averages that are used to isolate minor turning points, as we discuss in our newsletters.) And as one well-known market guru once said (paraphrasing), "A trader who uses only the 200-day moving average will often come out ahead in the market compared to someone who uses strictly the fundamental approach." Unfortunately, this market guru didn't stick to his own trend-following advice and has paid for it dearly over the years by continually trying to out-guess the market manipulators (a feat which is inevitably doomed to failure).
Whatever trend-following devices you use, if you follow the longer-term trend you're almost bound to come out ahead over time. This approach is always better than the hand-wringing approach that leaves the investor impotent to act and forcing him to ask over and over the "why" of a market trend along with trying to second-guess what the market trend is clearly telling him.
It is not in vain that it is said, "The trend is your friend." The investor's job is not to know the "why" of a market trend, but simply to recognize it and act accordingly. And isn't that what technical analysis (and investing) is all about?
