Gold, Oil, Gas–What You Should Be Watching For
Source: John Winston, Technical Commodity Trader (10/30/09)
There was a time not so long ago that obtaining information on gold, be it fundamental, technical or quantitive was a daunting task. . .You could buy the Wall Street Journal, get the price, and then draw—yes draw—your price chart. Or you could mail order for a yearly subscription to one of only a few companies that provided this service.
Now if you wanted fundamental information there was the Wall Street Journal, the Journal of Commerce, Annual reports from mining companies, and the local Library. I mention this not for a nostalgic look back, but to make a point about how difficult and time consuming it was to obtain basic information that we whip up on the internet now in a matter of moments.
We are clearly in the information age and the ease of "info at your fingertips" has spawned a whole new bull market in….technical analysis and information gathering.
Whatever your opinion you may have of the precious metals future price, there is information out there to justify your "position." Myriads of information. This can be very dangerous for the individual investor. No matter how much we'd like to think we are not biased and opinionated, there is no way around it. It is inherent and in our nature. The exceptions are rare. What usually happens is we tend to gravitate towards the information that most fits our view of the market's future price direction. And this type of information is especially powerful when we hold a larger than we should position in a stock, or commodity sector. And there are many voices (commentary) out there mixed in with an incredible amount of supporting data. The investor is left with the problem of sorting it all out by himself or procuring the services of a market maven to assist him with the details at hand. And even there I have seen a good analyst go from bullish to bearish and actually get subscriber cancellations. Unfortunately, this makes it very difficult for the analyst to remain unbiased knowing if he/she becomes a bear, and then subscriptions will suffer. Who do you know who's a bull in gold or any other commodity for that matter that accumulates bearish data and subscribes to an advisor who is an outright bear?
The proliferation of analysts and websites on the internet are many.
In order to be successful the advisor must have made some good/great calls at some point in time, and must have a good reputation. Most importantly is how the advisor performs when a trend change develops. A perma bull analyst who had services in the 90's for stocks must have built quite a reputation by just being long. But what were their results in this last decade?
If you're a perma bull there are subscription gold advisors and websites that held thru the entire collapse of the Mining stock sector where week after week a new "support" area would be chosen, a new channel drawn, and another key CYCLE would be due to bottom. One advisor, in order to remain bullish during the crash of 2008 would change indicators to suit their outlook. Near the end it got silly as the moving averages would be lengthened as long as it took to make the moving average look like it had not been broken by the price of gold during the bull market. I think near the lows the advisor was using a 21 or 29 month moving average on his long term charts. You'd look at it and it would show all the lows holding and of course the latest low was showing resting right on the line too !!! The advisor would go thru all the reasons why the low was about to be made, and if one got off he/she might miss the train.
The reality was that most of his subscribers were in STOCKS and not gold the metal. While gold was only dropping 30% the gold stocks collapsed. At their lows in 2008, a lot of investors had been pistol whipped to the tune of losses from 50%-70%. Those who used margin by buying the major producers and then using their margin to buy the junior miners lost everything and were wiped out even before the low arrived via margin calls.
On the other side of the aisle are the perma bears. There are some very famous ones too that have been allowed to be perma bears for many a year. There was a certain bear, who in all fairness called for a rally near the lows in gold. But in his view this was only a bear market rally in an on-going bear market. He called for a rally to 420 and was right on the money all the way up. Now we are talking a guy who had been bearish since the peak in 1980 and the results spoke for themselves. He had been correct for 20 years on the long term price of gold. And by the time we got to 420 in gold, he gave his first sell signal. Then a second sell signal at 460. By this time of course he had built up quite the case as to why gold was about to peak. How gold doesn't do well in a recession, and how the US dollar was still in a bull market and was just going through a correction. Well by the time we got to 480 his case data read like a dossier. He gave us the millennium cycles, the historical data from the last great depression, actually making a case that Homestake mining only went up after the whole stock market bottomed.
Finally in great detail, he laid out how the psychologies of the masses were not ready for a bull market in gold. At that 480 level in his own words he said to his audience "This is your LAST chance to short the precious metals at these prices for a long time". He was right on that call. It was the last chance to short gold at those price levels because gold just took off and we never saw those levels again. And do you know what? He has remained bearish throughout this entire rally all the way to today.
Now the above examples are not extraordinary just because each call could not have been more wrong about market direction. What is extraordinary about it is they still have a huge following. Granted there must have been a lot who left (what else you going to do once your broke) but the process of wiping out entire client fortunes are not achieved overnight. What happens is that once the "clients" are committed on the wrong side of the market, the advisor babysits himself and his subscribers throughout the demise of their equity account by assuring them at each new high or each new bottom that "this is it." This is the bottom and the bull or bear market is about to resume.
And that leads us to today. We have so much information at our fingertips. I recall reading that a study was made to determine if investor performance of today has improved along with the information age. It hasn't.
Fortunately there are advisory services that are not afraid to follow the trends and are willing to be bullish at times and also bearish when price dictates. Twenty year rallies are the exception not the rule. And even during bull markets, there are times when one needs to be bearish as most bull markets suffer at one point or other pullbacks that are as deep as 38% and even 50% or 61%. The commodity chart below speaks for itself. One must be flexible in the world of commodities because at the top, few were bearish.
Goldman Sacs Commodity Index
Recently, after a long consolidation of five months the commodity markets have come alive again as price has broken out to the upside. With the Asian miracle there have been new demands on food and energy to the global supply as an increase in wealth always brings new demand.
With the onslaught of fiat currency and the mass printing press of the United States and the loss of confidence in various governments, the investment world is also shifting towards gold and silver as a means of preserving their purchasing power. Taken in context, the fundamentals for food, energy, and hard money assets (barring another meltdown) favor the upside. The crude oil chart shows how close it mirrors the commodity chart.
Crude Oil Commodity Price
Here too we see that crude oil has recently moved out of a consolidation pattern of pretty much the same length of time as the GS commodity chart. In both charts, we see that we are not that far away from price resistance. Now if all resistance areas halted each commodity price appreciation, it would not be called resistance. It would be called "the top." So while the resistance for crude is going to be the 90 to 110 area over the medium term, the key is going to be providing the analysis of whether we get through that area. And that's where an unbiased investment advisor becomes the important factor. The chart above clearly demonstrates that you cannot buy and hold oil forever. (You can but your results will not be that good. There are some who bought above 140. But even more important, even the ones who bought at 90 are looking at a zero net gain over the last two years. So we think buying and holding is not a good strategy. If you're the type of person who uses an advisor, you would be well served with one who follows the trend, is patient and waits for low risk set-up's for his clients. That is our number one goal for our subscribers.
This recent breakout in energy and commodities is one that we've been watching and we think that the possibility of trend resumption has merit. Let's look at one more market.
Gold Commodity Prices
Since the meltdown of 2008 there is only one major market that has broken out to new highs and that is GOLD. Shunned as a barbaric metal for over 20 years, gold has quietly rallied 4X over this decade. More importantly, it has broken out to new historic highs after a long 19 month consolidation pattern. Long term price breakouts of this fashion can produce great price moves and the prospects for gold, when viewed in relation to what is happening in the United States, suggests that the potential for an inflationary environment down the road is one that is difficult to dismiss.
All of the demand/supply prospects look very bullish for gold and should investment demand increase from here, it could (and is already) overwhelming the demand. With the advent of ETF's the ability to buy commodities like crude and gold has been a huge success as far as providing vehicles for investors to participate in these commodities. But as we've seen, there are times you need to be out of the market. If we think about it for a moment, knowing when to get in is certainly important to success but knowing when to get out is the KEY to profits in markets like this.
Over the past few years, it was easy. Get in and stay in. We think over the next few years it's going to be a lot more difficult as volatility is the order of the day. Crude's drop from 147 to 35 is a clear demonstration that "holding" for the long term might not necessarily be the best way to go. While the fundamentals are known today, we can expect one thing. And that is that fundamentals will change. Crude is an excellent example. At the turn of the century, guess what was a key energy source? WHALE BLUBBER. Sounds incredible now but such is the case. Petroleum's only use was Petroleum Jelly. Remember that stuff? Petroleum is now the main supply of energy for the entire globe. Can you imagine telling a whaler 100 years ago that the stuff (petroleum jelly) that you rub on a baby's butt to keep it dry while in cloth diapers was going to replace whale blubber and become "the" world's main energy component and that the world would consume 400 million gallons of petroleum a day by the turn of the next century? You would have been laughed off the docks.
How about gold? Can you imagine telling someone 100 years ago that real money (gold), the stuff used since the dawn of civilization would be replaced by. . .PAPER. Not only would it be replaced by paper, but less than 2% of the world's population would even own gold. Then you would lay this bombshell on him/her. Even though paper has replaced gold and that less than 2% of the population own gold, the price of gold would rise from $20 dollars per ounce to 1000. . .a fifty fold increase. Surely they would look at you as if you were some nut. You could carry on with your story. You tell them that the United States government would confiscate all gold from its citizens, pay them $20 dollars for their gold, and then once they had it all, they would revalue it (overnight) at 35 dollars. Then they would make it illegal over the next 40 years for you to even OWN any gold. Can you imagine the look on their faces?
Since the dawn of civilization gold has been real money. However, in most of our lifetime that has not been the case. Real money (overall) does not lose its purchasing power. But paper money does. We can even make the case that the PRICE OF ANYTHING in the long term does not go up. What you're really seeing is the value of the paper dollar going down. Here's what I mean.
In 1908, Henry Ford sold his model T cars for $850 dollars or 42.5 ounces of gold. The base price of the all-wheel-drive 2010 Ford Taurus SHO with some (but not all) options comes to about $42,500 dollar or. . .42.5 OUNCES OF GOLD!
Now that we know what real money is, don't you think it's time you started buying some? If you're answer is a resounding yes, and you have never done so, do yourself a favor. Get the services of someone who is familiar with the trends so you can have the confidence to buy some. If you don't, 100 years from now some person will say something like this to another person. "Did you know 100 years ago, given the choice, people used to keep their wealth in paper instead of gold even though they knew that they would lose 90% of their purchasing power?
Think of how much more sophisticated the new 2010 Ford Taurus SHO is comparatively speaking to the Model T. Yet the price, in terms of gold has not increased one iota in all that time. If you don't own gold, do yourself a favor. Get some. If you don't have an advisor who is tracking the market for you, get one. One that follows price trends.
Let's take a look at one more chart.
Recall the story about whale blubber and how a SUBSTITUTE eventually arrived on the scene? The chart below is a chart of Natural Gas. As you can see, it has incurred a tremendous drop as it saw prices that were near 10 year lows. Recently natural gas seems to have made a MAJOR LOW in price. The move is in its infancy and for the last month we have been consolidating. While gold and crude oil are well along their way in their bull markets, Natural Gas is really just beginning to show signs that a major long term trend change may be in the making. Now is the time to seek out opportunities in this upcoming market. This is a market that has the potential to increase its usage in the area of transportation and home energy. Already cities use natural gas for their bus fleets and the technology to burn cleaner increases every few years.
Natural Gas Commodity Price.
In summary, the potential for the world to move away from paper is growing in leaps and bounds and the growing demand for energy is rapidly expanding. The advent of ETF's and other investment vehicles has made the participation of these markets to the average investor easier than it ever has. Gold is in a major bull market, crude is the horsepower of the world, and natural gas is a market that has probably put in a long term bottom and has the potential to do what crude did to whale blubber.
The charts also demonstrate however, that drops of up to 75% can and do occur in these markets. It also shows that 400% increases (gold) and 1400% increases (crude from $10 dollars to $147 this decade) can also occur. Thus the ability to cash in on these markets requires only two things. Knowing when to get in and knowing when to get out. We invite you to come to our website and follow along with us as we analyze the trends of these markets and look for low risk set-ups to enter them and participate in their current trends.
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