Thursday, August 25, 2011

What Next?

The most frustrating part of writing and posting market commentary is that people don't remember what they read.  We make all past posts available on an archive and a search feature makes it easy to access.

The markets have been on an absolute roller coaster for the past 30 days.  Readers clicked on our August 4, 2011 post before the market began to crash but failed to absorb the message.  We don't fault you for that but would like to use it to illustrate why capital losses ensnare most investors.

Many times we receive comment from readers with a statement like, "Boy you sure were right about that so tell me what is going to happen next?"  This is a trick question.  What the reader is saying is that we were too far out of the herd to be taken seriously when they first read our observations.  That is not a problem and will often be the case.  Then, the course they chose turned out to be fairly painful.  Now they use the facts of the past to evaluate who was right and then they seek to go with that person's recommendation for the future.

The reason why this is a trick is simple.  In life, you can never ever transfer the responsibility for decision making to another entity.  Sure, it is possible to hire a manager for your business concern or have a lawyer handle a problem but generally speaking you are responsible all of the time.  When the reader poses that question they are first trying to transfer decision making responsibility to us and more perilously they are using linear thought to do it.

We have written at length about the extreme peril associated with linear thought.  The future is only a cousin of the past and attempting to find success by doing what worked yesterday is a mistake that every successful investor has made.  Paradoxically, what worked best in the previous cycle is likely not to work at all in the next one!

The mission of this site is to help investors develop the ability to think for themselves.  If capital gains are desired there must be an understanding of how economic forces shift and create new price disparities in the coming cycles.  The first step is to understand that all humans, animals, organizations and mass groups respond to incentive.  While the incentives for each group are different the response is the same.  The action we are observing is a shift in behavior or a change in direction.  If you tax something more, people do less of it.  Everyone has a cheap uncle who drives across town to buy cheaper gas.  Try to observe without judgement the behavior of people around you.

Believe it or not these simple observations can be useful when studying and predicting what may come next in our economic reality.  If tomorrow will be another today we want to study the behaviors that are already determining what that moment will be like.  We have established the fact that once all political grandstanding has been tuned out the US is technically insolvent and spending $1.50 for every $1.00 it brings into the treasury.  We know from our in-depth study of the psychology of power and how humans acquire and hoard it that the politicians will only stop spending when the money is no longer available.  We also know that the money is being created by endless debt issuance at record low rates.  This behavior is stretching the system and will result in a shocking snap back towards the mean.  Considering the currency in question is the one in our wallet we have chosen to exchange that for a safer currency, gold.

At this point if you are still questioning what gold is please stop reading this and click here to understand the basics of currency.  We are pleased with our decision to seek a safe haven currency during this period of asset deflation married with monetary inflation.  There is no questioning this decision and the bull move has only begun.  What does however shock us is the massive price disparity between the metals and the companies mining them.

As you can see from this chart, the metal has continued to outpace the producing companies by a factor of 3. The green line is a gold tracking stock that we suggest you never own, and the blue line is the HUI an acceptable gold mining stock index.
We feel very strongly that fresh capital should be deployed in well-run precious metal mining firms.  Again, a core bullion position should never be sold.  We have covered this ad nauseum but here is another link to our recommended approach.

As these precious metal miners begin to report earnings the market will be shocked that they are beating all estimates.  No one on Wall Street seems to comprehend that they are selling gold at prices 55% higher than last year.  What will baffle the NY boys even more is how silver miners can be so profitable.  There seems to be no understanding that they were selling silver for $17/oz last year and now the same production level would yield an extra $23/oz considering a $40/oz spot price.

As always, our goal is to help you learn how to think.  We are not offering investment advice.  Learning to think for yourself can make life much more pleasant.

1 comment:

DannyBly said...

The CME raised silver margins five times between April 26th and May 9th (68%) and silver proceeded to lose almost 30% of its value in under 3 weeks.

Any thoughts on the potential impact of further margin hikes in gold?