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A few readers in the past
have complained that the Optimist’s boundless optimism for silver and
gold sound to them like a used car sales person pushing the car that pays the
highest commission. Those few readers
may be happy to hear that this Optimist can also sound a note of caution
about both metals. Through
abundant effort punctuated by some significant successes, and by more
mistakes than I care to admit, the Optimist has found that the best technical
system for him is an approach similar to the traffic signal light. A green light says it is a good time
to buy. That doesn’t mean
it is the best time possible to buy, since prices will inevitably be lower
before or after my trades execute.
Just as Alan Greenspan cannot see a bubble while he is in one, the
Optimist cannot see a bottom until after the lowest trade is history. I am satisfied to buy when silver or
gold are in their green zones, and then to buy more if prices offer a lower
opportunity later. Conversely,
prices which have risen sharply can get high enough to be attractive for
taking partial profits. That
profit taking area is the red zone.
Between the green buying area and the red profit taking area, the
yellow zone is for caution. The
Optimist does not buy or sell in the yellow zone. He simply waits in hopes that prices
will move higher into the red zone so he can take partial profits, or lower
into the green zone so he can add additional long positions. That patience in the yellow zone is
always rewarded with a subsequent market move into either the red or green
zones!
Caution
continues
For the past month, the
Optimist has viewed both silver and gold as being in the yellow zones. An abundance of caution has prevented
him from buying too much too soon, and from selling prematurely. Although brokers who work for trade
commissions are not likely to endorse this approach, the Optimist can assure
all that it helps to reduce the stress that flows from feeling forced to make
too many decisions. Defining the
green and red zones is more art than science, since it takes into account not
only prices relative to the long term channels, but also other factors of
significance. As an example of
two of those factors, here is a message I posted 10/08/05 on a few stock
boards:
Although the chart of gold looks
spectacular, it may be too much too soon. The MoreAU index (gold X US$)
is substantially above the top of its rising channel, and the MoreAG index (silver
X US$) is approaching the top of its channel. The MoreAU and MoreAG indexes
show changes in the value of gold and silver against all fiat currency. With
the MoreAU index well above its top channel line and the MoreAG index close
to its top of channel, my interpretation is that gold may be temporarily
overbought in the world markets, and silver is closing in on its expected
near term highs when viewed from a perspective of all fiat currency. Unless
the US$ weakens against other currencies, gold and silver priced in US
dollars will have increasing difficulty pushing higher than current levels.
You can find more information about the MoreAU and MoreAG indexes by clicking
the Gold &
Silver tab at the top of the Optimist site.
I am also concerned that silver has only risen to the major downtrend line,
but has not yet pushed through that barrier. Also, with copper prices still
increasing at a faster rate than silver, a continuing high level of silver
supply can be expected as a byproduct from base metal mining. The updated
chart of the MoreCu index
(silver / copper) can be found by clicking the link to When will the price of
silver explode? at the Optimist site.
This Optimist expects much higher prices for gold and silver in the months
ahead, so I am not yet taking any profits. At the same time, however, the
potential for both markets to be overbought in the near term keeps me from
committing any new funds to the long side of metals stocks right now. Any
time, of course, is a good time to purchase more physical metal! Cheers! Jim
In response to a question,
I added the following on 10/09/05:
A chart of the product of gold
times the U.S. $ (which I call the MoreAU index because it shows whether a
rise in the dollar price of gold is due more to gold rising or the dollar
falling) is the equivalent of charting the value of gold versus all fiat
currencies which can be converted to the U.S. dollar. This is more clearly
explained in the Gold
& Silver tab at the top of my Optimist pages. That explanation is
accompanied by a chart over the last two decades of the product of monthly
closes of gold and the U.S. dollar. These links show charts of the weekly
data for gold and
silver, and the
current high reading is substantially overbought. Whether or not anyone wants
to use this as one input in their buy-hold-sell decisions is up to them. I am
only highlighting an unusual data point which I view as a good reason to be
cautious with committing new funds to the long side of gold now. When the
dollar resumes its downtrend, or when gold corrects from its recent sharp
rise, then the imbalance indicated by the high level of the MoreAU index will
be corrected, and I will be an eager buyer again. Cheers! Jim
Although silver and gold
have pulled back significantly from their highs of four weeks ago, the dollar
has also increased sharply. The net
effect is that the MoreAG and the MoreAU indexes are little changed from four
weeks ago, and are still at significantly oversold levels. The MoreCu index has dropped to new
lows, and that shows copper is more highly in demand than silver. The continued high levels of copper
production will produce more byproduct silver, and that will also dampen the
physical silver market.
Significant pullbacks in silver, gold, the dollar, and copper will be
needed to correct the overbought imbalances indicated in the MoreAG, MoreAU,
and MoreCu charts.
This does NOT
tell you when to buy or sell
The Optimist cautions all
readers to not base their buy or sell decisions on this work alone. This is useful input, however, when determining
whether markets are low and green, or high and red, or yellow in
between! The Optimist expects
that this will inspire many questions and comments. He encourages all readers to add their
questions, answers, and comments to the forum sections at the bottom of each
page in the Optimist site.
Cheers!
Other
commentary by the Optimist:
http://sitekreator.com/Optimist/commentary.html
Contact: Optmst@Gmail.Com
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