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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
doesn’t 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 can’t 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 don’t know what I’m doing because
they say gold and silver will go straight up to $1,200 and $25 without a
pause. They may be right, and I’ll respect them either way, but I
am reminded of the Wall Street saying, "Bulls make money, and bears make
money, but pigs get slaughtered." 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 I’m
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 don’t feel too bad about that
lack of respect because silver hasn’t yet begun to strut
its stuff. As I indicated in September 2005, I didn’t 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 isn’t 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 wouldn’t 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 "boats"
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 Optimist’s charts don’t 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 don’t 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 don’t even get any respect about being able to say what I
mean! I don’t know when gold and silver will peak, but I’m
confident we aren’t 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!
Readers are invited to add their questions and
answers in the forum. Cheers!
By : Jim
Otis, “The Optimist”
The Optimist
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