Replies to post #2346 on Mostly: Classical

[Ed Monton]

By Peter Grandich

http://www.kitco.com/ind/Grandich/sep292003.html

Back in 1984, I began my career as a stockbroker for a man who published a newsletter at the time called "The Gold Letter". At that time, people like Howard Ruff had what was known as a 24-hour "War Room". The belief back then was that the world was going to Hell in a hand basket. Gold would soon go over $1,000 an ounce, oil would easily top $100 a barrel, inflation would forever be double-digit and 30-Year mortgage loan rates were over 15%.

Now as I approach my 20th anniversary in the business, the "War Room" is no more. Despite some nice counter trend rallies and a seemingly-forever-cry that it would go higher, gold instead worked its way lower over to the years until its bottom last year at around $260. Inflation and interest rates dropped to very low single digits. And despite a mere 70% drop in the NASDAQ from 5000, the "Don't Worry, Be Happy Crowd" on Wall Street has managed to convince investors that stocks and bonds are still the only real ways to make money and to preserve purchasing power. The more that things seem to change, the more that they seem to stay the same.

Risking eating crow, allow me to dare say: "this time it's different." I believe that the precious metals have entered a period of not only higher prices over time, but we can see a return of investors other than those who have long been called "gold bugs". I, myself, am proof of this. I left the metals arena shortly after the new millennium began. I couldn't even tell you the daily or weekly price of gold for the past few years. However, early this spring I concluded that gold had reached a major bottom from a technical standpoint. And, after visiting the PDAC conference for the first time in several years, I concluded that the fundamentals were shaping up for a powerful, multi-year upward move. At $325 gold, I suggested that the time was right to go back to the metals.

There are those who are adverse to gold and precious metals and they are vocal in their beliefs that investments in gold and precious metals are on par with purchasing lottery tickets. They offer their advice with a "herd mentality" because it offers safety ("Well, everyone else thought that was the best way to go….") and because they do not have to think or evaluate situations. Let's look at all three of their scenarios.

1- One of the biggest themes of the gold bugs since the 1980s was the imminent return of inflation. Ironically, after years of foreseeing it, yet never actually witnessing it, many of these inflation-bugs switched to the "deflation" camp at a point when factors that can impact inflation to the upside have begun to appear. None of those signs can have more of an impact than the declining U.S. dollar - something that we learned is now the target of the world powers.

2- In addition to this key factor, I believe that the U.S. government has tried to manipulate the consumer inflation prices to appear lower than they really are. The CPI gauge uses something called "geometric weighting". An example of this is that if meat prices rise substantially, the government assumes Americans will switch to burgers and no longer account for higher steak prices. An alarming statistic that very few picked up on was that real earnings actually declined 0.3 percent in August. That means even with the "reported" low inflation numbers; Americans are still not keeping up with inflation. I believe we have begun a process of reflating and that the gold market already recognizes it and that it has been rising in anticipation.

3- I used to hear financial planners state one should own gold as a hedge - which is good advice. The concept was that if the world did go to Hell in a hand basket, one's gold holdings would help offset the losses expected in one's equity portfolio. Yet in recent times, even this recommended hedge has been removed from most financial advice. Why? Because those in the third camp, who advise no gold whatsoever, harp on gold's poor performance as reason enough. What I find most interesting about this crowd is these very same people will have fire insurance on their home and theft insurance on their car. How many people do you know that had a fire at their house or had their car stolen? The number is miniscule. Yet, we all have that insurance - just in case. That same philosophy must also be part of every single portfolio. Own gold and hope that you never have to use the insurance that it gives you.

With tens of millions of investors caught in the spell of the "Don't Worry, Be Happy" crowd on Wall Street and considering that the majority of today's so-called financial advisors have been in the business 10 years or less, I sometimes feel like Don Quixote fighting the windmills. You cannot blame today's financial advisors because they have been raised on the concept that one buys stocks for growth and that one purchases bonds for income. They believe that the only thing that is allocated between stocks and bonds is cash. Ask them about gold and almost all will counter that one buys gold only when inflation is high, as a small hedge or not at all - not because they understand what they are saying as much as they simply have had no exposure to precious metals.

There is a phenomenal precious metals investment opportunity coming at us - but it is coming at us from the sun and most will not see it until it is too late. The few of us that see this opportunity risk ridicule and scorn solely because we are willing to "think out of the box". But a winning a popularity contest is not the mandate of a good investment advisor. A good investment advisor believes in himself and he/she always tries to protect the interests of his/her clients. This is not the profession - nor is precious metals the investment vehicle - for the spineless or weak-of-heart.

[Frank Pembleton]

H ... whether it's foresight or just simple fear outweighing my greed, I've made pretty good coin this year and don't feel the need to give it back ... some of the more experienced traders on this thread have moved to a more defensive position, and I can't disagree with it.

A 50% weighing to the PM sector-- too little, too much?

Personally, moving to a higher cash position when the risk/reward isn't so favourable will probably save you some mental anguish, there’s nothing more pleasing than buying back your old positions for less than what you sold them for. And on the other hand, there’s nothing more disturbing than watching retracements of 60% or more, only to witness a dorky guy like me buy the bottom for the next run-up. So what I’m saying is do your ego a favour and swing trade a small portion of your holdings.

Fwiw, I’m neutral on gold and bearish on silver short term – but that doesn’t mean I won’t be bullish like a bastard sometime soon.

It’s about capital preservation as much as it is mental preservation.

[Canuck Dave]

We should all frame Frank's previous post.

He got it just about right. The only thing I would add is that capital preservation is your number one job as a trader. Capital appreciation is number two. An investor can ride out 40% retracements, but only if you've got deep pockets.

Since this is the way I make my living, I can't afford to hold "for the long run" when it looks like the short term odds point down.

So I run.