Thursday, February 4, 2010

People are Still Asking "What the Heck is Going On"?

This morning, I watched a video of the CEO of Gold Fields, Mr. Nick Holland, expressing his surprise at Soro's recent statement that gold is the "ultimate bubble".  Mr. Holland said that almost every other expert on markets he talked to had a vastly different opinion of the metal - that it was "fundamentally sound" etc.

So, that being said, how does one explain the drop to a new low for this gold bear market, just moments ago?  If fundamentals are so good, if the experts all agree that gold is a solid buy and say things like "you just can't go wrong with gold", why is it that the price is in a sharp decline that will carry on for some months and shave nearly (or possibly more than) 50% off the recent highs of over $1200.00 /oz?

It is for the same reason that wherever you are reading this article, there are surely a laundry list of gold and silver forever-proponents, both young gold-bulls and those who have been saying it was the ultimate buy since before some of their readers were born.  That reason is sentiment, the psychology towards that particular asset.

We are in the final phase of the unwinding of positive sentiment that has been fueled by easy dollar credit and an overnight-rebound in gold in late 2008 to early 2009, just as those stocks that "always go up in the long term" continued to lose a staggering amount of value. We witnessed a flood of people seeking the "Safety" (translation:  profits) of gold - Now we watch the unwinding of the speculative chasers, the capital gains hounds.

For gold is not an "investment" - its producers can be, perhaps, but only if you're sharing in their profits - gold is a savings vehicle.  For a very long time we have advocated keeping half of one's savings in the precious metals (we favor roughly a 70/30 silver:gold allocation).  However, we are not like most gold bulls - we don't profess that $1200 is a fantastic time to buy, and that because the price is so high it must go to new highs.

This is the oldest flaw in the book - one that has been historically proven time and again.  The price/demand curve of finance that only exists in the realm of high emotion, little information, and many peers.  Price goes up, demand goes up.  Price goes down, demand goes down.

Here at Investophoria we try to step back from the foray and take a good look at the big picture.  We look at measurements of sentiment (including price) in order to determine where we are in the price/demand curve, how much farther we can go, and when the particular trend will change.  All these are integral to a winning strategy of investing, because if one doesn't know all the rules of the game, one has lost the moment they sit down to play.

We only care where the crowd thinks the price is going, in order to measure how many of that crowd are running the same direction.  We never have a particular bias for long or short, only the bias that we believe in our analysis and act according to it, on either side of the trade.

So many are shocked by the drop today.  The silver-bugs can't believe the price is below $16.00 / ounce, it's not possible!  And yet, if they had read our analysis, even just one article published a few weeks ago
they might have saved a nail-biting loss of 20% where they knew the price should be going up, and yet watching in horror as it plummeted.  Or if the gold-bugs had read the article we published calling the top in gold on November 26, and its subsequent and rapid fall, they might not feel the horror of watching their worthless FRNs go up in value relative to Real Money.

This is going to be a time of trials for all investors of any ilk.  The sentiment towards investment in general has been slow to unwind from its 1999 peak (as indicated by dollar volume), and has some years left to go before we get to that point where everyone isn't saying "turn your cash into assets", but "quick, turn your assets into cash!".  See the following charts:




Yes I would estimate that there is still much unwinding of psychology to be done - another good indicator of an end to the bear market in precious metals will be a level of dollar volume lower than that of 2008's low.

 This is still a young trend we have just begun - a toddler, compared to the multi-decade bull market that preceded it - in all investment assets.  There's a lot of life left in this one, and until it is "over the hill", we plan on profiting from it.  With some skill, we were able to open our short position within 1% of the market top, as were you , dear readers, if you followed along.  All our shorts are growing in value today, as all the hopeful longs and "long-term bulls" are yielding ground.  This is a trend that will not only continue, but also pick up in speed and breadth.

It appears gold and silver have resumed their downtrends, as have the markets as a whole.  This should be the first of the "big ones" in terms of drops, which we have anticipated for the last several days.  It will continue to surprise the vast majority (except you, who have been reading us, of course!).


As for gold specifically, it may try one last stab upward before a major downward fall, taking it well below the $1000.00/ oz mark, although the highest probability is that it has already begun a more rapid descent.  Once this level is reached, we are anticipating a highly volatile period of sideways movement before the last leg of its bear market brings it in the $650 range.
Silver should follow these price movements as well, however its moves will be far greater in percentage terms and it should fall eventually to the $8.00 / oz or less range.  If you want to see some of our arguments for why gold and silver are going to fall, and if you haven't read this article yet, you really should - it's a fan favorite and continual hate-mail magnet!

As always, keep your heads up out there!

Derek Blain.

P.S. Thanks to all the readers who submitted excellent suggestions for our upcoming subscription newsletter and trading alert services.  Some great input which we will be putting into practice in the coming 1-2 months as our site is developed and opened up to the public!

Suggestions are still always welcome, and if you have any, send them off to, or my personal email,!


  1. Derek,

    I have never been one to try and call tops or bottoms, just find a trend and climb aboard. I have been following your leads on several markets now, and have been short the Dow for awhile now. Good call, definitely many thanks!!

    Now, as for gold and silver, I have strongly felt that all these markets have been heavily manipulated, gold especially. I have felt for some time now that gold would retrace back to the scene of the crime, that being the breakout at around the $1000 level. If this level does not hold then I agree it could retrace to the $700 area, but I personally feel that this $1000 area will hold.

    As for silver, it has broken down from the head and shoulders top and is now streaking to its objective of around the $14 area. But once again, if gold holds $1000, then silver should hold above the $13.50 area.

    We shall see how it all plays out of course, but look forward to your subsciption services and your all your other informative comments.



  2. Thanks Derek, You da man! I am glad I found out about you recently and followed you opinion on silver a couple weeks ago. I sold $23,000 in silver bullion over $18.35 an ounce. Perhaps you are not necessarily an advocate of this method but we are no longer in a trading account so was our only option. There were other indicators that led me to that point of selling but it was your article that got me into actually doing it.

    I will now watch for "blood in the streets" and of course your timing opinion.

    I explained in response to another article of yours about my ineptness in market dealings back in the tech boom days but what else would concern me today is taxes.

    You explained recently how it would be better to make more profits by shorting ultra bullish positions and even using margin and how one could later buy even more specie than if one just bought, sold and re-bought bullion but as an American especially I would worry that say ten years from now, maybe even just five, our government will demand a much higher rate of taxes to cover all our follies of wars without reason and bailouts for the criminal bankers who have virtually destroyed our once great empire, err country. Remember Rome, remember Great Britain, Pax Romana, Pax Britannia, Pax Americana, all fall down!

    Some may think me a bit pessimistic but history always repeates in principle and we are replicating the same mistakes that all empires before have made starting with the debasement of our money supply.

    "There is the moral of all human tales,
    Tis' but the same rehearsal of the past:
    First freedom, and then glory - - When that fails,
    Wealth, Vice, Corruption- - Barbarism at last,"
    Lord Byron


  3. Thanks Derek, nice calls. I was glad I was short gold and ES today... do you see a baby bounce tomorrow or more selling right out of the gate? I'm looking to get short again in a good spot.

  4. I haven't really checked the intraday's for the end of the day yet as I have been SWAMPED with emails from readers.

    However, based on a quick look, I would suggest a probable gap-down, fill, and continuation of the downtrend - might possibly see a small higher-high on top of the close, but the odds are still strongly downside for tomorrow.

    @ Greg - while you may disagree with our price objectives, and we certainly can be wrong (something about being human?), our forecast stands as the most probable target for silver in our analysis and we will see where Mr. Market (investor sentiment)takes us from here.

    @ Carl - We do concurr with the "cycle of empires" idea in general, and the best part is that now we have the stock market to gauge the overall mood of society to see how it correlates to such a long-term and vastly-encomassing change to the human landscape.


  5. Derek,

    I opened a regular trading account, because I was unable to short stocks in my Roth account. Is it still a good entry point to short STD and JPM?


    Kiley Kuhl
    Wisconsin USA

  6. Kiley,

    Shorting STD at this point is entirely at your discretion, as it is in what we call the "majority" point of the decline - where the majority of perception in this move has shifted to negative. As such it may already re-gap down again to newer lows right off the open and a good entry will be missed - but have no fear, there will be others!

    As for JPM, since it is still near the price level of our entry, or Goldman Sachs (which went up and hit the neckline resistance only once before retraction beautifull), I personally would still short either one - I did double up on goldman at $159.50 as I said I would if it approached the neckline.

    That's what I've done or would do in your situation, however in the end the choice is up to you - don't forget to always do your due diligence and analysis on every trade. While we try to be as objective in our analysis as possible, we are still a filter for raw data, passing it on to a third party - the best thing you can do for yourself long-term is to objectively study proper analysis and develop and good system - that way you can keep accountable on your own terms any recommendation or action I might post.

    Best of luck, and congrats on your new short-ability.


  7. Thanks for taking time to reply, it's much appreciated.

  8. derek,just discovered you from your kitco post and already i'm a big fan! what do you think of elliot wave theroy,specificaly ewt? carter

  9. There has been no absolute consistency regarding the value of gold among the experts whatsoever. There is the most mind-boggling yin/yang amongst this group imaginable, much more profoundly so than the most insignificant of events: the heads or tails of the Superbowl coin toss or the efficacy of coffee for the good of the human body. To look to any experts now is like using the forcasting 8-Ball. Flip the thing and marvel at the result.
    Fact: Gold and silver constitute the real money over paper. Period. Take it from there and when the price drops, well, getchasome but don't bet the farm. It's the kind of thing that you keep and keep. Without it, you are flying without a parachute. Happy landings!

  10. Derek,

    My question is on your recommendation of holding silver/gold at a 70/30 ratio. Is your reason simply that you expect silver to appreciate more than gold or is there something else as well?

    Looking forward to your newsletter.
    Best of luck.

  11. From Kung Fu Vic

    If anyone would just take an hour and look at history of commodities you'll find a fist quarter drop but the 9-10 yrs the overall trend is up! I agree with derek 100%

  12. Yep, the herd is going to get slaughtered soon. Goodluck to all you optimists.

  13. If there were no deceptive influences injected into the market, making money would be easy.

    Or would it?

    It could not be - never.


    Simply the maths would not allow it.

    The markets do not make money, they only redistribute it. The only money in the markets is what people put there.

    But there are dividends some may say for the investment. Yes, true,

    That is if you are fortunate enough to buy at the right price earnings ratio in a successful company.

    But if these companies were easy to spot, and by a market devoid of 'deception' with today's information that would not be difficult, we would all pile in and bid up the price (which does happen) against us.

    Knowing this, we should not be surprised at these vagaries, and market gyrations.

    Commenting on them is as meaningful, and helpful, as stating that the world is round not flat.

    However, behind the man generated deception in order to gain advantage for some,there are natural influences which moves the money that moves the markets.

    These come from early identifying changes taking place as life advances, and acting upon those changes.

    Here are three 'facts' to be considered. I accept that my 'facts' can e challenged

    I have to continue on a following post

    Ray Newton London UK.

  14. FACT (1)

    We have created with technology a world that can considerably reduce the demand for physical labour. (Far more than already achieved, much is waiting in the wings)

    This is at a time when the world population is increasing. We are seeing this clearly in our small island of the UK.

    Even when the economy 'picks up', whatever that means, there will never be enough work for the world's growing population. NEVER! (All things remaining equal)

    The vast majority of workers internationally, much greater percentage than present ratios who find employment will be employed on menial jobs, delivering menial incomes for all their lives.

    This will be harder on the more advanced nations, particular those labelled with the tag 'Western'; simply because they have enjoyed the 'good life' at the expense of the third world for a considerable time. There are other reason, it's true.

    Fact (2) A leap frog, within a short space of time, from a world where the 'millionaire' turned heads to where a trillion dollars hardly causes a ripple - this, I accept, is mainly because almost no one can really contemplate such an amount, just cannot occur without eventually some seismic change occurring that will reach into every area of our daily lives that will reshape the world as we have known it, and particularly our financial system.

    No, it will still be 'roundish' seen from outer space, but life upon it will have to accept considerable change, and readjustment - some of which is already taking place, and causing for many, concern, and angst.

    The reason it hasn't happened with great, swift, impact, so far is undoubtedly due to the power of those controlling the 'reshaping' (or redefining). This power is something that so many who should know better have difficulty in understanding. These are the ones who will often refer to Buffet, or Gates as being the wealthiest men on the planet. They just don't get it.

    Our 'controllers' are masters of timing because they set the timer.

    Fact (3) A world in turmoil through dramatic change causing social unrest. with the populations of today and the easy flow of information and communication, is a difficult one to control, and becomes more so by the day.

    This is why more tighter control of what we in the West have come to value as our civil liberties, will be necessary, and therefore humanity will have to accept more infringement of those freedoms.

    They are being steadily installed by law, and by deed under the guise that it is necessary to protect our freedoms from those who are envious? How ironic we surrender them, to save them.

    The mass accept this with hardly a whimper.

    No one can grumble. We have sanctioned it by our apathy, and ignorance.

    However, unless there was someway to surgically remove the seven deadly sins, completely, from the minds of man “As a man thinketh in his heart, so is he.” ( Proverbs chapter 23,) then what alternative is there to replace a 'One United World' scenario that is being shaped by those with the considerable economic and political power to achieve this by moving the scenery, and pulling the strings that make all others dance to their tune?

    This does not mean that in the end their way will all be bad. Only time will reveal the answers to those with concerns. Meanwhile, try to enjoy the dance