Thoughts on Markets

Tuesday, April 22, 2008

Precious Metals Having the Summer Blahs!

Precious metals are up a bit today, because the dollar is moving lower again (still)! Gold is at 920.20 and silver 17.51. However, it appears as though we are in for a long dull summer. Examining the graphs, above, we see on the 1-Year Graph that gold remains in a long term bull market. But as we look at the 30-Day Graph, gold is trading in a range between about 910 and 940. Until it breaks from this range, it will be dull for us in precious metals.

On the other hand, the general markets seem to have discounted all the economic problems. Richard Russell says that the market looks forward better than any small group of advisers or gurus. That has historically been true. There is the collective wisdom of all the buyers and sellers in the general market. The market appears to have resumed its long term bull posture.

As sound economists have known for centuries, a free markets involves the collective wisdom of all the buyers and sellers which is far superior to that of a centrally planned market. From the Book of Proverbs "For by wise counsel thou shalt make thy war: and in a multitude of counsellers there is safety." (Pr. 24:6) Adam Smith in The Wealth of Nations calls this the "Invisible Hand" which guides the free market. This principle is critical to success in any market, and certainly, in the securities markets.

However, the hooker is that our markets for goods, services, and securities are not free. All are subjected to manipulation by central banks and governments of the world. At the foundation of this intervention are the FIAT paper currencies of the world which are subject to the centralized "wisdom" of bankers and governments. From there, we are confronted by regulation, excessive taxation, and direct currency intervention in markets to accomplish a wide variety of goals.

Were the financial markets to be free, they would very dependable indicators of what lies ahead for the economy and the markets, themselves. However, the ability of the markets to look ahead are limited by the prevalent direct intervention and manipulation of paper currencies. Given this limitation, the security markets are very likely the best forecaster of future economic health. Thus, we must use the market technical action (prices and volumes of exchanges) for assessing the markets and, probably, the economy.

The markets have been uncertain for a time. Under Dow Theory, the DJI failed to confirm the action of the Transportation Average. The Transportation Average has been a strong force. We are beginning to see why. While the trucking industry is suffering greatly, because of the increases in fuel prices, the rail industry has become the transportation of choice. It is less costly for long hauls and the trucks have been relegated to more localized delivery to save on fuel expense. The DJI has increased a good bit during the last couple of weeks. The use of rails has caused the Transportations to be strong, and the movement of goods to markets has been a stealth encouragement for the DJI which we are now beginning to experience.

The unknown, at this time, is when/if the central banks will begin to replace the dollar as the reserve currency of the world. If that occurs, it will be devastating to the purchasing power of the dollar. With that shadow hanging over us, we must reduce debt and build reserves of cash and investments to cover us in event of job loss. The economy is still experiencing stagflation with price inflation and wages not able to keep up with the loss in purchasing power of the dollar.

Some of my stops on mining stocks have been hit. I did not want that to happen, but it is likely best. Of course, there were a limited number of shares with stops. Most were set weeks ago at 15%. I have replaced the stocks with options on, mainly, silver mining stocks and have also purchased some calls on the DIA (which follows the DJI). That is what I am doing at present, and it may or may not be wise for you to follow. Study and make your own decisions.

Remember that our Sovereign Lord is in absolute control of all. Rest in His promises.

Best to each, Doug


  • At 12:12 AM, Blogger Pan said…

    Risk management failure and runaway greed nearly sank the whole financial system.

    If these self-professed free-marketers can't control themselves, someone will have to step up to the plate and do it for them.

    The "magic of the market" was distinctly unmagical, and the consequences have not yet been understood by the market in question.

    They don't think they did anything wrong.


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