Still Optimistic, but with Continuing Caution

Published 11/05/05.

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 overbought 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!