August 3, 2006
For the most part, you must ignore short-term market fluctuations because in these volatile markets they make absolutely no sense.
For example, stock markets have short rallies (sometimes just a one-day sharp rise) whenever people interpret the U.S. Federal Reserve Chairman’s comments as less hawkish though most of the time since short interest is so high in the current global markets the rallies are nothing more than strong momentum waves created by the shorts scrambling to cover their losses in a rising market. Then Israel engages in war with Lebanon and gold rallies. But then for some inexplicable reason, people start believing the U.S. dollar provides a “safe haven” and plunge into the dollar, causing gold to fall.
Then the U.S. releases stats that show a weakening housing market and people’s confidence returns to the global stock market (because as confidence in the U.S. market goes, so does confidence in the world’s major markets) believing the U.S. Federal Reserve will not raise interest rates in response to the weak housing market. They buy in, once again, causing the shorts to cover and create mini rallies which have yet to show that they are sustainable, because again, they are not created by any real long term confidence in global markets. Then Israel escalates their war with Lebanon, Lebanon escalates their war with Israel, and the thundering sheep herd again flees for safety in the U.S. dollar and the price of gold plunges.
So what do short term fluctuations in market indices tell us?
Try to predict stock market directions on short term behavior that is dictated by the thundering sheep herd and you’ll drive yourself crazy. So keep your eye on long-term trends that are inevitable. We could be wrong about our long term predictions but we highly doubt it. And the long-term trends are that gold will rise much higher and the U.S. dollar will move much lower.
Short-term guesswork is for speculative traders. A long-term outlook should drive your investment decisions.
Now that said, the U.S. dollar looks primed for a bullish mini-rally right now, but if it materializes, be prepared to flee the dollar after this happens. As far as what the U.S. Federal Reserve will do in the future, we believe they’ll raise interest rates a couple more times. Maybe they’ll pause raising interest rates at their next meeting, may be they won’t. It’s really not worth speculating on what they’ll do at their next meeting. All we know is that most likely the rises aren’t over, and that U.S. interest rates and inflation will both rise in the near future, and the U.S. dollar will eventual shed considerable value.
And while the U.S. HUI gold bug index looks like it’s also 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. After all, the moneymites should always tell you what is the proper thing to do in the long term.
There is a famous story that I’m going to paraphrase roughly because I can’t remember exactly how it goes having read it so long ago. But the intent of the story is the same as my paraphrasing of it here:
A long time ago, a young teenager who lived in the Qinghai province in China decided that he wanted to be the best martial artist in the country. After three months of begging, the young man finally convinced the best Norther Shaolin gung fu master in all of China to take him under his wing. The young man did not disappoint, training every day for six hours. After one year, though the young man was an accomplished fighter, he felt as though his master was holding out on him. He asked his master, How long before I’ll become the best fighter in all of China? The master answered, Ten years. Disappointed, the student started to train for twelve hours a day, sometimes even skipping meals.After six more months, he asked his master, How long now? The master answered, Fifteen years. Unbelievably frustrated, the student started training day and night. After another six months, he asked his master again, How long?, to which his master replied, Twenty years.
If you don’t have vision, you’ll never have success in martial arts. All of my teachers have always told me that the students who come in with goal of earning their black belt often disappear from the dojo the moment that they earned their black belt. Why? Because they never embraced the true warrior spirit of a martial artist, even during all the years of training it took to earn a black belt. The same type of spirit and vision is necessary for an investor. Chase short term dreams and you will often end up with nothing but a series of losses. But focus down the road and dig deep enough down the rabbit hole to generate this focus and you will end up making the most intelligent investment decisions of your life.