An Optimist gets no respect


No respect for an Optimist (published 3/07/08)


With all due attribution to Rodney Dangerfield, I have to tell you than as an Optimist, I get no respect.  For example, no one phones to thank me for setting the stage to profit from this most recent bullish move in silver and gold.  I called for caution in December 2006 when gold was up to $650 and silver was above $14 and near its highs, but its hard to get respect from precious metals bulls when saying something that doesnít sound bullish.  I tried to make it clear in my July 2007 commentary that with gold at $660, silver at $13, and both seeming to drift to nowhere, that was a great time to be accumulating a full position in the metals.  Maybe that recommendation got no respect because I quickly added to not plunge into buying all at once, but to add a little at a time over the following weeks.  That approach left me with good buying power a few weeks later to pick up more gold near $650 and more silver at less than $12, but I still got no respect.


You canít go broke by taking a few profits


Now here we are with a 50% gain in gold and more than a 60% gain in silver since my commentary eight months ago, and my respect phone still does not ring!  I confessed to some people that I plan to take some profits soon, a little each day or two for perhaps the next few weeks, but they told me I donít know what Iím doing because they say gold and silver will go straight up to $1,200 and $25 without a pause.  They may be right, and Iíll respect them either way, but I am reminded of the Wall Street saying, ďBulls make money, and bears make money, but pigs get slaughtered.Ē  My approach to take a few percent of profits, at several times and too early in a move, makes sure that I will have buying power left when an inevitable correction appears.  But that old fashioned idea of taking some profits during a move is out of fashion with the top and bottom calling technical analysis contingent, and Iím sure that I will get no respect for that either.


A lethargic silver bull gained no respect


A little more than a year ago, I asked if silver could one day cost more than gold, but my respect-o-meter dropped way negative for that.  Sure enough, gold significantly outpaced silver for the following ten months, and the silver to gold ratio dropped to the bottom of its channel, until two months ago when silver began to catch up.  Even the markets gave me no respect!  I donít feel too bad about that lack of respect because silver hasnít yet begun to strut its stuff.  As I indicated in September 2005, I didnít expect silver to explode until base metal production was significantly reduced, because two thirds of silver production is a byproduct of base metals mining.  As you can see in the charts of copper below, base metal production continues to increase with increasing base metal prices.  To ignite the silver rocket, base metal inventories need to rise further to depress base metal mining.  My guess is that silver will repeat its previous history of outpacing gold soon after the increasingly severe recession chokes the base metals warehouses with increased inventory and constricts base metal production, which results in sharply reducing the production of byproduct silver at a faster rate than silver consumption is reduced.

No respect for a not too bearish view on stocks and houses


My respect phone has also been noticeably silent about my June 2005 view on the prices of stocks and houses.  While I agreed that stocks and houses were significantly overpriced, I argued that it might not be profitable to bet against either.  Some bears who have shorted the stock markets will tell you that they wished they had followed my guidance instead.  It is exceptionally difficult to make profits by betting against a stock market that is not permitted to fall in price.  Admittedly, my comparable statements about the Fed finding ways to support housing prices look a little shaky, but the opera isnít over until the large lady sings.  My continuing guess is that the Fed will create a way to prevent an avalanche of plummeting house prices that would decimate the U.S. economy.  No, I am not advocating the purchase of residential real estate now that prices have dropped a little.  If there was a way to sell short on the prices of existing real estate, however, I wouldnít recommend that approach either.  My guess is that the Fed will orchestrate a way to minimize additional real estate price declines while they proceed to inflate the economy at a maximum pace.  Eventually, the rising tide of the inflation process will lift all the real estate and stock ďboatsĒ high enough that their prices will no longer need support to keep from falling.  My view is that those who wish to bet against stocks and houses would do better by increasing their bullish bets on silver and gold instead.


The Optimistís charts donít merit much respect, either


Even I must admit that my Optimist charts are not nearly as complicated as those usually highlighted in the articles we read.  My charts donít show the support and resistance bands that always contain the market action, except of course when the action goes outside those bands.  Neither do my charts have all the convoluted technical indicators or patterns that always identify exactly when to buy or sell, except of course when they add sufficient confusion that they induce analysis paralysis.  My charts well deserve the lack of respect they are accorded.  For what it is worth, however, my charts do show the channel lines that I draw to help me to put the market action into a perspective that is helpful to me, and they show the big picture as well as the recent activity.  As an example of how my charts work for me, consider the long term charts of silver and gold which are updated through 3/06/08 and attached below.  I see that both silver and gold are very close to the top border of an expanding channel that I called a cornucopia.  I will admit that in the past there were a few (thousands, actually, but at least that is less than millions!) times when markets pretended that they did not know about the predictive powers of lines drawn on charts by the Optimist.  I must caution all readers that this could be yet another opportunity for the markets to teach me a little humility by once again blasting through my trend lines.  Readers should consider this information to be only an optimistic guess, and should be cautious about applying any of it to their own finances.  For me, however, I am satisfied with better than 50% gains over the last eight months, and I am happy to have the opportunity to capture a small percentage of those gains to use for buying future price dips.  I update my charts each Friday evening.  Readers are invited to view when they like.  Hopefully the charts will be helpful to some.  No respect is required to take a look!  Cheers!

Bonus Q & A


Q) So you think this bull run in gold and silver is over, and you are selling out?  You need sympathy, not respect!  Would you be interested in buying some cattle grazing land a few miles west of California?


A) No!  That is not at all what I said.  I donít even get any respect about being able to say what I mean!  I donít know when gold and silver will peak, but Iím confident we arenít near there yet.  My bet is that the final highs will be much higher than most people expect.  I only said I am taking a few profits off the table now, and planning to buy back into a future correction.  The most that I am willing to sell is 25% of my maximum position.  The remaining 75% is a core investment that I do not intend to sell until the Fed raises interest rates to higher than real inflation, which they will not do because this time it really is different.  I gave up long ago on trying to time market tops or bottoms.  Nobody, including me, has any respect for my skills at calling tops and bottoms!


3/13/08 A reader writes:

I just dumped all my gold stock for cash. That represents about 1/4th of my chips. The rest is in gold and silver bullion.  What should I buy when the correction comes, with an eye towards selling at the next peak?  Loading up my pickup and driving to the local coin shop doesn't sound too smart.  What is the "better way"?  I'd like to use that 25% for silver related trading.  What are some things that I could look at?  SLV?  SLW?


Comments by the Optimist:

Congratulations on taking a well deserved profit.  I am doing the same too!  Then, lets both hope that we will get a chance to buy back more at a lower price this summer.  I agree that it is not the best idea to haul pounds of silver and gold down to a coin dealer when you want to capture profits.  The buy - sell spread on physical is as financially painful as the work to haul the stuff.  My game plan is to keep at least 25% in paper (SLV, PAAS, SLW, AEM, GG, etc.).  Then I can easily sell the paper whenever I want to take profits.  When buying back, I replace the paper percentage and also add more physical to the Do Not Sell pile.  Cheers! Jim


3/13/08 Dave Andrews (author of You canít eat gold) writes:

My feeling is that POG and POS will correct a bit later this spring, perhaps consolidate, and spend most of the summer languishing.  I'm not buying much right now (prices too high) nor am I selling much.  Just waiting for summer.  If you look at the seasonal charts for both Au and Ag, invariably they consolidate and go on vacation for summer.  Best time of year to accumulate!


Likewise I agree with you about real estate values.  Nothing goes straight down.  Too many bears out there!  If you have a contrarian streak, you have to assume that with the warmer spring days coming, the birds tweeting, the sun shining, the flowers blooming...folks are going to be out looking at houses.  Nobody is any more satisfied with their current digs, than they ever were.  "Joe Six-Pack" (a demeaning name I never cared for) will be out with the wife and kids looking at properties. 


Question: Given that this is an election year (despite the current CRAP they're put up for candidates), do you foresee all the gawd-awful stuff happening that most prognosticators are falling over themselves to be the first to predict?  Choose an essay - virtually any one - and we read of imminent bank failures, a higher foreclosure rate, bankruptcies by the gazillions, and the collapse of the entire financial system.  In due time, if things are not handled correctly - yes, I could see a gradual slide into a painful and protracted recession, perhaps even a depression (inflationary).  But I just don't see it all imploding this year.  Was wondering what your thoughts were on this!


Good to read your ideas again!  I have not written much lately.  Instead, we have been doing - bought a piece of remote acreage 20 miles from the Canada border, and we're stockpiling grains, guns, woolen socks, leather boots, a 1500 gal water cistern, water filtration, cordwood, a huge buried LP submarine (to be filled - you guessed it - in the heat of summer!), generators, heirloom seeds, and other such survival stuff.  If we don't really need it all, so much the better!  But we'd rather be personally prepared.  After all - you can't eat gold!


Comments by the Optimist:

Dave, Great to hear from you again, too!  Later in the spring, I will be seriously envious of your preparations, but for now, I am happy to be in a somewhat warmer climate!  My guess is that TPTB will still have the ability to hold things together through this year.  I am hopeful that we will see more signs of impending collapse before the house of cards falls flat.  Cheers! Jim


3/14/08 A reader writes:

I got into mining stocks about 2 years ago.  I've amassed a nice position, but haven't come up with a solid strategy for taking profits.  Ideally, I'd like to take profits and reinvest in what I think will be a bull market in (the last 6 months have been a beast though)!  Do you recommend selling 25% of your holdings with 75% long?


Also, do you think metals will suffer terribly from the recession.  I invest in junior miners, which are a-long-way from production.


Comments by the Optimist:

My philosophy may not be best for everyone, so I try to avoid giving recommendations about what other people should do.  I am comfortable with taking as much as 25% profits with silver and gold very close to my upper channel line, but that might not be the right thing for other people, so I am not advising anyone else to do the same thing that I am doing.  Another concern is that my approach could be seriously wrong in two major ways.  After I sell my 25%, silver and gold could have a blow off top comparable to 1980, but at much higher prices.  I can handle that risk of making fewer profits than if I did not sell, but I do not want to be responsible for other people's anger if they think that I told them to liquidate a significant part of their position too soon.  Alternatively, the prices of silver and gold could plunge soon, before I have the opportunity to take my profits in a leisurely way.  Once again, I can handle the risk of missing out on profits and holding my full position for a few more years if need be, but other people could be a bit irritated if they thought I told them to cash in some profits at too slow a pace so that they do not take any profits at all.  I have no special knowledge about when or where precious metals prices will go, so I can only follow my philosophy and hope for the best.  I am happy that you took the time to read my work, but you must do your own due diligence so you can decide for yourself what is the best plan for you to follow.


If the FED and other nations central banks actually tried to control the amount of currency they pump into the economy, then a world wide recession would be a bearish time for all industrial commodities, including precious metals.  My guess is that neither the USA, nor any other country, will take the risk of a potential deflationary depression by tightening financially.  I expect the FED to keep the money flowing at ever increasing rates in an effort to keep the economy from doing worse than a mild slowdown.  That additional money pumped into the economy will propel inflation and precious metals higher.  I am very bullish on silver and gold.  I just hope that I can sell a little to take some profits now and then have an opportunity to buy it back at lower prices later this summer.  Wish me luck!  Cheers!  Jim


3/14/08 G. H. writes:

Buy GOLD & SILVER Ö. To pay off the National Debt and Trade Deficit.


Is it fair and American if the US govt. is buying gold & silver to pay off the National Debt and Trade Deficit.  With the demise of the US Dollar, what will that do to our economy, nation, and status that we as Americans should have in the world.


The US govt. could be buying gold now at $900/oz in hopes that it will increase to $10,000 or $20,000 per ounce or higher to be able to pay off the countries debt with worthless US dollars.


Meanwhile, the Fed is destroying our purchasing power.  How do they expect  the average American household to pay their mortgage, buy food and gas with worthless US dollars, since most Americans wonít get the kind of raises in their pay checks to keep up with the kind of rampant inflation that the US govt. is bringing down upon most Americans as they continue to dramatically lower interest rates which is killing the US dollar and driving the price of gold & silver higher and higher, to the Fedsí benefit.


I ask youÖ.has the Feds lowering of the interest rates caused our mortgages interest rates and other consumer interest rates to decrease?   NO !


These rates have actually been increasing.  So then, why is the Fed continuing to lower rates, if it is only helping them to increase the price of gold & silver and hurting the rest of the average American by increasing their mortgage interest and credit card interest rates.  Thanks a lot !


Whatís nextÖ. Is the US govt. going to start a huge media campaign to promote gold and silver so that the price of gold and silver goes out of sight to $50,000/oz or higher using their media, movie industry, news networks, etc.  Where is the end to this?


The govt. is always telling us they want to control inflation.  Yea Right !!!  Thatís why the Fed is continually lowering interest rates, destroying the US dollar, our purchasing power and America and causing their next bubble to occur.  The gold & silver bubble!  Did they not learn their lesson in the past bubbles they created. (i.e. the internet stock market bubble and then the real estate bubble) and now, the soon to be Ö. The gold and silver bubble.


Comments by the Optimist:

I think you have summarized the big picture very well, but with a few minor exceptions.  The government does not need to buy gold or silver because they can simply print as many fiat paper dollars as they wish to pay off any debts that are based in dollars.  Instead, it is we citizens who desperately need to buy silver and gold to have at least a modest amount of real savings as insurance against the further devaluations and loss of purchasing power that will surely happen.  Reducing interest rates is not intended to help the ordinary citizen who is already earning less interest (before taxes!) on savings than the true rate of inflation.  The FED is focusing the interest rate cuts on increasing profits and reducing costs to banks and large corporations.  Silver and gold (and other commodities) could well be the next great bubble, but that does not change the need for ordinary people to buy silver and gold as their best form of protection from the ravages of raging inflation ahead.  Cheers!


3/14/08 A reader writes:

As a small investor in gold I sincerely would appreciate your take on alleged intervention by "them".  If "them" are central banks (the infinite) with printing presses and we are the speculators (the finite) then when the time is right the infinite can buy or sell as much as they want. If this is correct thinking then will it not be "them" that decide the price of precious metals? So if the price of gold is perceived at some point to endanger their paper will they not then act together to kill the precious metals market?


Comments by the Optimist:

My guess is that the powers that be (TPTB) have their hands full of emergency fires to fight, and they cannot afford to keep a fire hose focused on their efforts to submerge the prices of silver and gold.  I think that a substantial amount of the fiat paper they are creating to keep the stock market afloat and to bail out the banking sector flows into precious metals.  I have no doubt that TPTB can and do pick opportune times to sell precious metals sharply lower, but the cushion of huge amounts of fiat money just pushes the prices higher again.  It is easy to give TPTB too much credit for being able to do the impossible, but holders of large sums of fiat (which is becoming worth less before our very eyes) will always be happy to use that surplus of fiat paper to buy something that has real and lasting value.  I'm betting that silver and gold offer the lasting value that is most desired.  Cheers!


Readers are invited to add their questions and answers in the forum.  Cheers!



* * * Notice * * *

This commentary presents only the viewpoints of the Optimist, and it is intended only for perspective and entertainment.  Please do not interpret any portion of this work as investment advice.  If any of the concepts discussed here appeal to you, then you must do the work to decide if and when and how you should invest.  The Optimist does not ask for any profits you make, and he cannot be liable for any losses incurred as a result of your investment decisions.  The Optimist wishes you the best of luck in whatever you decide to do or not to do.  Cheers!


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