In Today’s Difficult Investment Environments, Technical and Fundamental Analysis Alone Won’t Work

18 February, 2009

In an extremely difficult investment environment, it is often difficult to know who to believe. Deflation or inflation? Have financial stocks bottomed or do they have much more to fall? When gold corrects sharply, is the gold bull over or still alive? Is oil heading to $20 a barrel or $80 a barrel? For every analyst arguing one side of the above arguments, you have another analyst strongly arguing the opposite. And often you have the majority of analysts taking one position in the above arguments and then flip-flopping like a politician to the opposite position just two months later if things move the opposite way from their predictions.

For example, when we look at oil prices, oil has plunged from $147 a barrel to less than $35 a barrel in 7 months! During this time, the deflationists have been out en masse in the mainstream media, claiming that plunging oil prices were directly attributable to plunging demand worldwide from economies that were stagnant. For example, here’s a link to a story that seems to infer that plunging oil prices are caused primarily by plunging US demand and growing US inventories. Though it would be ignorant to ignore the affect of a slowing global economy on demand for crude oil and its affect on lower crude oil prices in the futures markets, it would be equally ignorant to attribute the majority of crude oil’s plunge to a shrinking global economy as well. How many people really believed that when we had $147 a barrel crude oil prices that this price was solely attributable to skyrocketing demand?

Instead, I can assure you that these stories have been planted to distract you from the real culprit of plunging oil prices —fraud, manipulation of crude oil futures, and political scheming to try to save the US dollar. The plunge in oil prices, after the fraud that caused the run-up to $147 a barrel, is most likely more significantly attributable to the root of this global crisis — a monetary crisis — than slowing GDP rates of world economies. There is much more to the story of any continuing and extended weakness in the United States Oil Fund, LP (NYSE:USO) than just sluggish demand from slowing world economies. Has global demand really shriveled so drastically to account for a 76% free fall in crude oil futures prices? I’ve taken the stance for a long time now that the extreme volatility we have experienced in gold, silver, and oil futures markets is most likely nearly entirely driven by Wall Street manipulation and free market interventions executed by the US Treasury and the US Federal Reserve. For years, I’ve argued that Central Bank and government intervention into these markets have created massive distortions. In fact, the free-market interventions are so obvious now that even mainstream investment figures such as Donald Coxe, chairman and chief strategist of Harris Investment Management in Chicago, have made similar claims in recent months.

Unfortunately, if you rely solely on technical analysis and fundamental analysis in today’s investment arena without accounting for or anticipating government and Central Bank interference into free markets, you will not understand how to make money. The problem with US regulatory agencies is that they have been asleep at the wheel for the last decade and have been non-responsive to those individuals that have been awake. Repeated requests to investigate fraud in stock markets and commodity markets have been ignored over the past decade by top US regulatory agencies, even when the requests were accompanied by overwhelming evidence.

US Representative Gary Ackerman (D, NY) demonstrated his understanding of the worthlessness of these regulatory agencies when he berated the SEC for aiding and abetting massive fraud in US Securities markets below.

[flash http://www.youtube.com/watch?v=5BfUB5a994k]

I strongly believe that fraud on a similar scale is taking place right now and has taken place for years on the COMEX gold and silver futures markets. In the future, if US Congressmen finally realize this, you will see US Congressional hearings of a similar contentious nature occur with the US Commodity Futures Trading Commission. Currently, there is a mountain of circumstantial evidence of very large players attempting to manipulate gold and silver futures contract prices, even during this recent spike in gold and silver futures prices. Remember, Harry Markopolos presented evidence of the Bernard Madoff $50 billion fraudulent Ponzi scheme to the SEC over a period of 9 years and was repeatedly stonewalled and ignored by the SEC (Securities Exchange Commission). Markopolos stated in testimony before the US Congress that the SEC was protecting fraudsters instead of prosecuting them and “that’s why they shy away from the big cases.”

Asked by lawmakers if his warnings to the SEC could have been more explicit, Markopolos said, “I even drew pictures so I don’t know how I could’ve been more explicit.” He added the agency “roars like a lion and bites like a flea…The SEC was never capable of catching Mr. Madoff. He could have gone to $100 billion” without being discovered, Markopolos testified. “It took me about five minutes to figure out he was a fraud.”

Just like Markopolos, it did not take me long to conclude that massive fraud is and has been occurring in the New York-based gold and silver futures COMEX markets. And just like Markopolos, I also presented what I believed to be strong evidence of this fraud to the commissioners of the overseeing regulatory agency, the Commodities Futures Trading Commission (CFTC). While my efforts were acknowledged by the CFTC, in their own words, as “great info”, no action has been taken upon my request for an investigation into fraudulent activity in the gold futures markets. I felt that I certainly presented enough compelling circumstantial evidence enough to warrant an investigation, but so did Markopolous, and he was ignored for nine years. On the other hand, Ted Butler’s tireless efforts in presenting fraudulent COMEX activity to the CFTC has resulted in an internal investigation but as of yet, there still has been zero action as a result of this investigation. In the end, all investigations are ultimately worthless to the common investor unless the investigations are sincere. As Markopolos stated in recent US Congressional testimony, he believes that the regulatory agencies’ intent will never be sincere until a drastic overhaul of the agencies occurs.

Markopolos hit the nail on the head for the biggest reason why the efforts of people such as myself and and many others to expose fraud in certain markets is being ignored by regulatory agencies: “What you’ll see is the [regulatory agencies are] busy protecting the big financial predators from investors and that’s their modus operandi right now.” In the case of gold and silver futures markets, when the agencies involved in the fraud most likely include the US Treasury and the US Federal Reserve, you will never see a true investigation materialize. So if, as investors, we are all fighting an uphill battle against fraud that has been imprinted within the “system” for a while, what is my point, right? My points are the following:

(1) Fraud has been part of the system for a while now, it will continue to be part of the system, and every investor needs to anticipate fraudulent activity to be profitable in these markets. Reliance on technical and fundamental analysis only will most likely lead to poor analysis.

(2) During periods of great economic crisis such as the one we are facing today, fraudulent activity will increase.

(3) Fraudulent activity manifests itself in the form of great distortions in stock markets and commodity markets. Why do you think you have seen financial stocks bounce around from $40 a share one month to $85 two months later, back down to $30 a share six months later, and up to $90 a share one month later? Why do you think you’ve seen gold plunge from over $1,000 an ounce in futures markets to $680 an ounce and then climb right back to more than $950 an ounce?

So the lessons to be learned are these:

(1) Volatility, due to massive fraud and free market intervention, is here to stay.

(2) To know how to play this volatility, you have to be able to analyze the situations properly and understand if fraudulent schemes are sustainable over the long-term or if they are only sustainable over the short-term.

(3) By taking step (2) into consideration above, you will know if rising financial share prices are a house of cards ready to tumble again or if they are a good long term play; if tumbles in gold prices should be interpreted as the end of a gold bull or a great buying opportunity; if oil prices are likely to remain low for a while or if a rapid spike in prices is likely in the future; and so on.

Do this, and you can make volatility your friend and not your enemy, because for now, volatility is here to stay.

[tags]Markopolos, Madoff Ponzi Schemer, SEC Fraud, COMEX fraud, gold, silver, oil, USO[/tags]

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