October 10, 2006 –
On September 13th, I wrote this entry “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.”
Just this week, Jon Nadler, a gold analyst at Kitco.com, confirmed my beliefs when he stated that his examination of recent prices revealed that hedge funds have been dumping huge positions of gold recently. Because managers of hedge funds are never investors but traders, and are always looking for the quick fix and next trend to increase their typical 20% of profits cut, the minute an asset turns south, they run for the borders and look for the next asset that will provide them with a quick run-up with no consideration of the future. We are still in the shock phase of gold as many investors have been shell-shocked by the recent corrections, but trust me, the awe phase is not too far away.
I believe that gold will continue to correct and that it has not reached its bottom yet but is most likely to reach it very soon, possibly even within the next month. This is when the awe phase will commence.
On the other hand the U.S. markets have already reached the awe phase with euphoria about the Dow approaching 12,000 and U.S. blue chip stocks at bargain basement prices now, but mark my words, the shock phase is coming soon. As I said before, due to the interference of government forces in the markets because of the upcoming November 7th elections, this throws a huge monkey wrench into the picture. Were it not for the approaching mid-term elections, I would be much more inclined to say that the shock phase was coming sooner rather than later.
The ratio of insider sells: insider buys has generally been a good predictor of intermediate market actions. When this ratio is above 2.5: 1, it is a bearish indicator. In August, in the U.S. markets, there were almost $11 trillion of shares sold by insiders and only slightly more than $1.5 trillion of shares bought by insiders for a sell: buy ratio of almost 7:1. In September, the number of insider sells dropped to about $6.5 trillion, but more importantly the number of insider buys dropped drastically to only about $430 million, sending the insider sell:buy ratio to over 15:1 For October, up until October 7, this ratio increased even more to 18:1 (Source: Thomson Financial).
So while the public has been floating from media declarations of record highs (which really aren’t record highs if you compare apples to apples and compare the Dow’s mark today against an inflation-adjusted Dow index from seven years ago), to say that insiders at corporate America apparently are not sharing the general public’s sentiment is an understatement. As I said before, I often speak of market corrections in terms of the U.S. markets because global markets also tend to correct when the U.S. markets correct heavily. However, there will come a time in the not too distant future when this will no longer hold true. In any event, awe is about to strike the gold markets, but be warned, a shock is coming too.
