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Stock Market Trend Forecast Oct - Dec 2019 by Nadeem Walayat

Gold Investing, The Art Of Speculation

Commodities / Gold and Silver 2010 Jun 28, 2010 - 03:18 AM GMT

By: Howard_Katz


Best Financial Markets Analysis ArticleAfter the great gold bug victory of the 1970s, the economic establishment had been humiliated and disgraced.  This was because none of them knew any economics.  They all had gotten their fancy titles and positions by apologizing for the bankers’ privilege to create money.  The bankers (and their associated vested interests) got rich.  The American people got poor.  (This is the first generation of Americans poorer than their parents.)  And so it paid off for the bankers to hire a gang of charlatans, buy them fancy titles and infiltrate them into prestigious positions in academia so that they could use their prestige to defend the bankers’ privilege to create money.

The gold bugs of the late 1960s wiped the floor with these phonies.  We saw clearly that the price of gold, then $35, was going up and advised people to buy gold stocks.  The establishment, scared to death that any mention of gold would lead to demands for a gold standard (which would take away the bankers’ privilege), responded, not with their (pitifully weak) theories but with insults and ad hominem attacks.

In other words, the economists you see quoted in almost every newspaper are shills and hacks.  A more disgusting and contemptible group of weasels does not exist on this earth.  (Don’t worry that I am going to get into trouble by speaking so frankly.  You see, the establishment deals with me via the same technique they use on the price of gold.  They pretend that I do not exist.

So I decided at the beginning of the 3rd millennium A.D. to seek a little justice.  I am challenging all of the nation’s mutual funds to a race – the race of the millennium – in which I compare my performance (printed fortnightly in the One-handed Economist) with Lipper’s Diversified Equity Funds, published quarterly and carried in Barron’s.

As you can see, it is a rout.  For the first half of the decade, I was bullish on stocks.  I turned bullish on gold in December 2002 but was of the opinion that the housing stocks would outperform gold for a while.  During 2005 I shifted completely into gold and have been a gold bug ever since.

For most of the first 3 years of the decade, I was bearish on stocks, but I turned bullish on Oct. 11, 2002, just one day after the bear market bottom.  I thus avoided losing money in the 2000-2002 bear market, and I made nice profits in the early years of the 2003-2007 bull.

I failed to predict the late 2008 bear, but I was in gold stocks, and they bounced back rapidly.  I stuck to my position, and the subscriber who began following me on Jan. 1, 2000 today has almost doubled his capital.  Compare this with the average establishment broker, advisor or what-have-you, whose clients have not quite broken even over the period.

There is a financial radio show in my section of the country which bills itself as the best money show on radio.  It recommends only mutual funds; so you know that its performance over the decade is very close to that described in the chart above – that is zero.  One week a caller asked the show’s opinion about gold.  The host hit the roof.  Gold is a collectable.  Gold does not pay interest.

That is true, but computing from its 2008 high gold is up 25%.  The DJI is down 25%.  The S&P is down 28%.  Computing from Jan. 1, 2000 gold is up 336%.  The DJI is down 13%.  The S&P is down, again, 28%.  Compared to that interest is a pittance.

Let us look more closely at the accusation collectable.  Is this for real?  Why should a person not buy a collectable?  Is money made on a collectable inferior to other money?  Don’t collectables go up in price?  Have you ever heard of collectors’ art, rare stamps and coins?

Of course, when this gentleman said “collectable,” he really meant speculation.  His point was not that collectables go down in price.  (They mostly go up.)  It was that, if you speculate, then you are a bad person.  The argument is: don’t make money because then you will be a bad person.  If this is the case, then the listeners to this (and many other) radio show(s) are definitely good people because they are not making any money.  Actually, speculation is a valuable skill to society because it brings prices of goods closer to their true value.  The good speculator buys goods when they are relatively low and sells them when they are relatively high.  He exerts a bullish force when the price is low and a bearish force when it is high.  He thus moderates price fluctuations.  So when the investor steps in to let his capital be used by American industry, he pays a price approximating true value, and the same is true when he sells.  Thus the investor says, “Thank you speculator for maintaining a price which is reasonable and accurate.  You are an asset to the economy.”

After the 1929 crash, the Democrats accused bearish speculators of selling short and increasing the severity of the crash.  At that time, no statistics were kept on selling short, but as a result of the fuss raised by the Democrats, the SEC started gathering statistics.  These statistics have shown that in every bear market since that time the shorts covered their positions as the market fell (thus moderating the decline).  In every bull market, the shorts put out their lines as the market rose (thus moderating the advance).  In this way, shorts have been a moderating force on the market since records have been kept.

What did cause the 1929 crash was government in the form of Herbert Hoover.  Hoover’s beliefs were back in the Middle Ages; he thought that both speculation and lending at interest were wrong.  Hating both of these Hoover banned lending money at interest for the purpose of speculation (brokers’ loan rate).  The bullish speculators were forced to sell (because they could not get loans to carry their positions), and the crash of Sept.-Oct. 1929 was the result.  The crash was then blamed on economic freedom and used to justify many of the measures of the New Deal.  (I know, you were told that Herbert Hoover was the last defender of free enterprise.  That was a blatant and outrageous lie.  Indeed, in the early 1920s, FDR recommended Hoover for President, saying, “There could not be a better one.”)

The issue of investment versus speculation is much more important than you realize.  Almost everyone, except for me, will tell you that you are an investor.  But an investor is someone who wants to put his money to work (meaning either earning real interest or a return on capital such as dividends on stocks or rent on real estate).  The speculator wants to make a profit by buying low and selling high.  As noted, both have a legitimate place in a free economy.  But you are being misled by advisors who, believing speculation to be evil, avoid stepping on your ego by calling you an investor.  I remember that at the gold conferences of the 1970s people were lulled to sleep by being told that they were investors.

You see, speculation can be very profitable, but it is also difficult.  When you speculate, you are in the big leagues playing against the best players.  You are trying to take their money, and they are trying to take your money.  Good speculation demands the best thinking that you have.  The investor, on the other hand, does not have to think too hard.  He relies upon the speculator to set the price somewhere near true value, and that is good enough for him.  All he is interested in is his coupon/dividend, etc.

So by calling you an investor, they are lulling you to sleep.  They are hiding the fact that you need to put in good, hard study to win at this game.  For example, from time to time I will recommend Technical Analysis of Stock Trends by Edwards and Magee.  Also highly recommended are the works of Ludwig von Mises and Murray Rothbard.  But these require hard work, and if you are not up to it, then do not try to make a career of speculation.  Speculation differs from all other professions in that, when you mess up, you pay them.  It is sort of a negative salary.  After all, Warren Buffet did not get rich by letting people like you take his money.

One thing which the astute speculator must quickly learn is that human beings have a deep urge to follow the crowd.  Such people all want to have the same opinion as their fellows.  For this reason, they are prone to enormous swings in opinion.  Most people get their opinions from their local papers.  But the local papers, also feeling the same urge, want to have the same opinion as the New York Times.  Thus the entire nation is swept by the same opinion. 
It would be one thing if the institution which everyone was following had established a record for accuracy.  But exactly the opposite is the case.  The last two big examples are the 1982 bottom, when the Times was trumpeting Henry Kaufman, who was predicting depression, and the 2000 top, when the Times was trumpeting Glassman and Hassett (Dow 36,000)  In 1982, the New York Times stock was 3.  In 2000, the stock was 40.  And in March 2009 it was back just a little above 3 again.  Everyone who followed the Times lost their shirts, and many of them do not know that the Times exists.  The Times itself had a financial crisis.  They had to mortgage their new headquarters and take a loan from Mexican billionaire Carlos Slim.  They slapped down the Boston Globe unions in a manner that can only be described as union busting and which, if done by anyone else, would have provoked a scathing editorial in the Times.

Actually, the Times became a great paper because of Adolph Ochs, who took it over in 1896.  That was the year of the great political battle over the gold standard in which McKinley (pro-gold) defeated Bryan (anti-gold), and that was the year that the phrase “gold bug” was first used as a label for a supporter of the gold standard.  Ochs was a gold bug in this original sense.  He was also a believer in free enterprise, an enemy of socialism and a true American.  His family, who turned his paper into a socialist rag, have betrayed him, the paper he left them and their country.  But reputations sometimes persist for a long time after they have ceased to be deserved, and that is the case with today’s Times.

If you want to be a successful speculator, you must make a commitment to see reality as it is, not reality as seen by other people, not reality as you want it to be.  If you develop a theory about the market, you must test that theory against the facts.  If it doesn’t work, then it isn’t true.  (By their fruits ye shall know them.)

A study of the markets show that the short term is hard to trade, and on this level most people lose.  The path to success is to play the big moves.  The big money is made in the big moves.  The big moves are easy to trade.  You get on board the trend.  You do not try to catch the exact top or bottom.  You just ride the trend and let it make money for you.  Look at some of the big trends of our era: silver 1971-1980, up 38 times, gold 1970-1980, up 25 times, DJI 1982-2007, up 18 times, S&P 1982-2007, up 15½ times.  In every one of these, as the trend was just beginning to lift off, the vast majority of people decided that the market was much too high and chickened out.  I have mentioned the gold bug who, in 1972, with gold at $65/oz., gave up his hope that it would ever hit $70.  There was Robert Prechter, who forecast DJI 3,600 in the early 1980s, gave up too soon and remained stubbornly bearish from 1987 to today.  If you don’t need the psychological comfort of having others agree with you, then you have the mental toughness to make it as a speculator.  You are one of the few, good men for whom the One-handed Economist is looking.

The One-handed Economist is written and published fortnightly by myself with regular issues every other Friday and special bulletins when necessary.  Price is $300/year ($290 for cash customers subscribing via U.S. mail).  For e-mail customers, the letter is posted on my website, (password protected) on Sat. or Sun.  Cash customers should send $290 to: The One-handed Economist, 614 Nashua St. #122, Milford, N.H. 03055.  Thank you for your interest.
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