January 14, 2007 – In Part I of this three part series, I discussed how the long tail of investment analysis and strategies can help one understand the direction of the U.S. dollar. Here in Part II, I’ll discuss:
How I’ve Used the Long Tail of Investing to Repeatedly Predict the Price Behavior of the Gold
In the maalamalama newsletter I delivered to subscribers on July 25th, I stated “We believe gold is a great asset to own as you all know by now. In an article you all received several weeks ago, I mentioned that it was a great time to consider buying gold. And while the U.S. HUI gold bug index looks like it’s primed for a sharp decline, you can choose to liquidate gold stocks you own now and buy back at a lower price in the near future if indeed this materializes. But even if it does, this won’t shake our confidence in our long-term outlook for gold because we know short term fluctuations hold no meaning for the long-term outlook. And because short term fluctuations tend to make no sense, don’t let it shake your long term convictions as well.”
I further stated that “I believe that we would see another sharp correction” and that I “would not chase gold higher even as it rose higher every day because I knew a correction was coming.”
Well, I had purchased into gold stocks about June 5, so I had been fortunate enough to buy in at almost the exact bottom for the period between April and September, 2006.
I have indicated exactly at what points I made my predictions about the direction of gold’s price behavior in the above chart.
Most times my predictions were in opposition to 99% of the sentiment being reported in the major media, as you will see if you finish reading this post. But my ability to do this is not just taking a contrarian viewpoint of the overwhelming sentiment on Wall Street and in the mass media and of the many experts that are quoted in the mass media. It 100% depends on the long tail of investing analysis techniques that I utilize. So let’s explore how my comments in past newsletters and blogs relate to the above chart.
In my August 22nd newsletter, I stated, “Well the correction has come, and I believe that gold will head below $600.” I made this statement when gold was still trading at $625 an ounce and this belief was based on my niche, long tail of investing strategies that I utilize.
In my September 12th newsletter, I stated, “This week gold sharply retreated to about $592 an ounce. In fact, I have good reason to believe that gold will challenge its June lows of $570 and move possibly even lower before heading sharply and steeply higher once again.” I followed that up with a quick comment the next day on my blog: “I recently blogged about gold’s sharp decline but wanted to follow up with another blog so people don’t get my message twisted. I am still very confident that after this correction ends that gold will go much much higher.”
On my October 1st newsletter, I stated, “The recent sharp decline in gold has shaken a lot of gold bulls out of the market with many people exiting and cutting their losses. And as steep, quick and brutal as this last correction has been, we may still be in a consolidation phase where gold may dip even lower before starting its next leg higher. But that leg higher I’m convinced will start very soon.”
On October 4th, on my blog, to clarify what I meant by “soon”, I stated, “I still believe that gold will go lower before starting a historic leg up. Stay tuned and I’ll tell you when I think gold has reached the bottom of this current correction.”
On October 6th, gold, as I had predicted in my September 12th newsletter, challenged its June loss of $570 an ounce and in fact went to about $560 an ounce.
How Learning the Long Tail of Investment Analysis Will Prevent the Mistakes Experts and the Mass Media Make Every Time There is a Short-Term Reversal in the Precious Metals Markets
Then as gold climbed higher in early November to about $630 an ounce, at a time when again the bandwagon analysts started to tout $700-$850 gold by year end, I blogged on November 6th, “Yes, I know that I’ve been silent about gold’s bottom but that’s because I don’t think we’ve reached it yet. I’ve merely just been very patiently waiting for the consolidation phase to run its course, but that doesn’t mean I haven’t been taking some strategic actions. So I’ll break my silence to let you know my thoughts. Yes, I realize that it seems that gold has bottomed as it has been steadily rising for the past couple of weeks. Still, certain indicators I track seem to point to the fact that we will see one last major correction before the true gold bull finally starts its run.”
And this is where I stand right now. I still believe that Gold will start a run considerably higher as soon as the current downleg finishes but the downleg we are experiencing now may be the “one last major correction” I was expecting on September 12th.
Every single time there is a reversal in the precious metal markets, every single pundit chips in and says gold is going to soar if the reversal is an uptick or gold is doomed if the reversal is a downward trend. However, gold is an asset where short-term reversals are historically sharp and rapid, so the only way to know what to do is to use the longtail of investment anlaysis to get an accurate read on what are the long-term trends. Period. Otherwise you will drive yourself insane if you listen to the major media as the majority of the reports disseminated through the mass media demonstrate zero understanding of the forces that drive this market and where it is ultimately headed. I compare the shoddy analysis of gold’s behavior in the mass media, even by large global firm’s chief economists, to the current analysis that extremely warm winter weather is causing energy prices to dive. Sure, that’s an important factor, but only one of a multitude of factors. Yes, only one of many.
If you’re thinking, “Ok, even if you predicted all the rises and dips of gold for the past six months almost exactly as they played out before they happened, the volatility would drive me crazy,” you must remember that volatility DOES NOT equal risk. Just read my Nov. 20th blog “Does Volatility Equal Risk?” here to understand why the long tail investment analysis I utilize minimizes the relevance of these short term dips and rises. Even if you don’t want to play the dips and rises, if you understand the long term behavior of gold (which you NEVER will if you rely on the faulty analysis of mainstream analysts), you will be fine as long as you remain firm during the choppy short-term behavior.
Finally, when gold started rising higher at the end of the year, in the December 28th, password protected blog, I wrote, “With the price of gold, I’m not yet 100% convinced yet that this uptick we’re seeing is the beginning of the next bull leg for gold. I still need to see some type of sustained movement higher in gold stocks to indicate that perhaps a true bull leg is forming.”
Sure enough just days later, gold started to take a dive. In response to the dive gold is taking, again I’ll show you the difference between traditional analysis and the long tail of investment analysis that I utilize in predicting gold’s behavior. Mainstream financial news service Reuters stated, “Gold futures plunged more than 3 percent in heavy trade Friday to their lowest level in more than two months, and silver tumbled almost 5 percent, as funds bailed out on the precious metals after the dollar surged on a surprisingly strong U.S. jobs report…George Gero, senior vice president at RBC Capital Markets, attributed gold’s decline to weakening oil prices, strong U.S. jobs data that pushed the dollar to a new high, and profit taking ahead of the weekend.
“When all the negatives come together at once, the funds pull the trigger,” Gero said. “The funds hate uncertainty. Always, it’s easier to just sell and then take a second look.” The dollar rallied for a third day after the Labor Department said the U.S. economy generated 167,000 new jobs in December, well above market expectations for a rise of 100,000, leading investors to scale back expectations of a Federal Reserve interest rate cut in the near future.”
So here’s why so much of that analysis is wrong. On September 13th, on my blog, I wrote this, “Gold has increased volatility these days because of all the morons that run hedge funds that pump and dump commodities such as gold. Recently I’ve already read of numerous hedge funds that were forced to close due to millions of dollars they have lost for investors based on their speculative bets. Prior to the Gold ETF coming into existence just a couple of years ago in the U.S., it was difficult for hedge funds to speculate on gold in huge positions. Unfortunately, now it is not. And unfortunately, gold, already a traditionally volatile asset, has become more volatile because of this.”
So in that respect, OK, I’ll acknowledge the Reuter’s report for realizing that the skittishness of funds helped drive down the price of gold in the beginning of January. Of course, gold’s sharp decline to begin 2007 produced reports everywhere that speak of the demise of gold. Just as we saw many experts calling for $700 to $850 gold by the end of the year every time gold had a short-term rise in 2006, we see the same doom and gloom when gold retraces. When I performed a Google search for 2006 year end gold predictions:
I saw that Citigroup metal analysts predicted gold would end up at $700 at the end of 2006, and a professional newsletter that touted $850 gold sometime in 2006, whereas gold ended up at about $630 at year end 2006.
At the end of 2005, UBS, a top global financial firm, raised its 2006 forecast for gold to $520 an ounce, and Graham Birch, who manages a Merrill Lynch & Co fund stated, “The price of gold may rise to $725 an ounce by 2010 as surging economic growth turns China into the world’s biggest jewelry consumer.”
Obviously all of those statements were way off, as gold hit a high of $725 an ounce in May, 2006, not needing until 2010 to reach this level as predicted by the Merrill analyst, and exceeding the high water mark predicted by UBS by more than $200 an ounce. Though I will concede that predicting the top price of gold for the year at the year’s start is incredibly difficult, I will still take my predictions from the point forward when they are actually in writing through my newsletters and blogs and stack them up against any of the analysts and the chief economists at the world’s leading investment firms.
If someone had followed my analysis in gold and the dollar since I had been so specific in my calls since mid-2006, they could have made a fortune with large enough investments. The same would not have been true if they were following the opinions of the million dollar men — the chief analysts and economists at the world’s top investment firms. So what is the secret?
There’s no magic. It’s just my analysis methods. I use niche, propietary investment strategies where I seek to leverage the flattening of the world and the resultant increased accessibility to never before available information to make my calls. They do not. I call these strategies the long tail of investing and investment strategies.
My review of my calls should ably illustrate the power of seeking the longtail of investment analysis and investment strategies. Furthermore, if anyone wants to learn, it is quite simple as all the methods for doing so are contained within the curriculum of the maalamalama course.
My point in this argument is this: When analysts in the mainstream media chime in with their analysis, since the majority of fund managers that invest in the gold ETF have no understanding of the metal they invest in and merely just ride trends, they all bail at the first sign of short-term weakness. That is why I hated the day the gold ETF and silver ETF started to trade in the U.S. markets. The short term actions of these clueless fund managers won’t change the long-term course of gold, but their ignorance introduces a ton more volatility to this asset class than is necessary.
Furthermore, I always see newsletters advise buying the gold ETF as the “conservative” approach to investing in gold. As you can see from the above paragraph, there is not much conservative about the behavior of the gold ETF. In addition, most people that desire to invest in gold don’t know the multitude of ways to purchase gold. There are different ways to buy physical gold in different forms; if one wishes to buy paper gold, there is the gold ETF; for gold stocks, there are gold indexes that are hedged and unhedged, options on gold indexes, and gold mining companies, many of which vary immensely in risk/reward setups. I very rarely ever see the best ways to invest in gold discussed anywhere (though we do let you know in great detail what they are inside our maalamalama online campus).
But returning to the Reuter’s report that “funds bailed out on the precious metals after the dollar surged on a surprisingly strong U.S. jobs report”, if you have read any of my previously posted blogs on the failures of the CPI inflation index to present an accurate picture of inflation rates, then you already know that jobs reports can also be manipulated by governments to present misleading representations of reality as well. How can there be so much chatter of a faltering U.S. economy yet have a strong jobs report?
If your business was making less money, your profit margins were shrinking, and future growth prospects looked bleak, would your response be to hire more personnel and increase your overhead so you can further cut into decreasing profit margins? But this is what the government wishes for us to believe.
So why would the government want a “surprisingly” strong U.S. jobs report? For the same reason they want low oil prices now. The U.S. government knows inflation is much worse than the “official” figures that they report, and they know that faltering energy prices will help ease the rate of inflation. They know that they wouldn’t be able to fool everyone with their statements of inflation is under control as people keep checking their wallets and watch their money disappear. Furthermore, a stronger dollar will help ease the rate of inflation. How do they achieve that through the jobs report? Release a surprisingly strong report to increase global confidence in the U.S. economy which in turn will prop up the U.S. dollar temporarily.
As far as people that will respond, “unseasonably warm winter weather has driven oil and natural gas futures down, and are you going to tell me that the government can control the weather? That’s ridiculous!” My response is this. Sure, warm weather has definitely played a role in driving energy prices down. But it is not the ONLY factor. There are a multitude of factors that cause energy prices to drop, among them, government and state-sponsored collusion and manipulation. To believe only unseasonably warm weather is the only factor that had led to energy prices being driven lower is naÃ¯ve, though I know by now, we as a society are used to the pundits telling us to believe why things happen, and we will believe them without question.
As far as this being the beginning of a bear market in gold as the bandwagon analysts are now predicting, that’s rubbish. Recall one more time that on November 6, I told maalamalama readers “Still, certain indicators I track seem to point to the fact that we will see one last major correction before the true gold bull finally starts its run.” I haven’t checked these longtail investment indicators yet so I don’t want to give a specific prediction yet but let’s just say that it won’t surprise me at all if this is the middle of the major correction I expected and if gold continues to fall sharply some more. (for more details on what point I look at to determine whether gold has bottomed or if we are indeed in the middle of a further downward slide, read my previous posts) Again, remember that I have expected this and this does not change my long term outlook on gold one bit.
To get the longtail view of oil and global markets behavior, read part III of this series.
J.S. Kim is the founder and Managing Director of maalamalama, a comprehensive online investment course that uses novel, proprietary advanced wealth planning techniques and the long tail of investing to identify low-risk, high-reward investment opportunities that seek to yield 25% or greater annual returns.