July 20, 2010

More on SHORT GOLD NOW…

What I try to do with this newsletter is, in as plain English as possible, show you why I think what I think…

I CONTINUE TO THINK GOLD IS A MARKET PRIMED GO THROUGH A CLASSIC COMMODITY COLLAPSE…and here is a bit more of my perspective as to why.

Commodity prices are generally moved by in and out flows of buyers and sellers. At the bottom of any market, nobody wants to own it. At the top, everybody does…There are two “pictures” that follow here. The first is a diagram of my own mental version of how the bearish to bullish mob psychology cycle actually works. The second is a chart that I believe is a real world example of what the preceding diagram is an attempt to describe.

I don’t know if what I’ve drawn here makes any sense to you…If not, maybe I can put into a few words…

At the bottom of a market, all of the news is typically extremely bearish and the preponderance of speculators want to short the market, or beyond that, have zero interest as buyers.

As the market does move up in price, along the way it typically will attract more and more buyers as the pendulum of opinion slowing shifts from full blown bearish, to not so bearish, to neutral, to mildly bullish and so on.

When you reach the ensuing final stages of a bull market…when this specific market is all over the news, with opinion everywhere citing the bullish case…is generally when you get the greatest build up of buyers. Everybody, including the proverbial shoe shine man, knows the bull market story and clamors to get in on the trade, oftentimes resulting in one last major spurt on the back of some supportive news event. Now the market is loaded…and pretty much everybody who ever would buy, has bought and they are all sitting there waiting for the profits to roll in.

However, if you have reached the point where the market is fully saturated with buyers, as you have to have new buyers to keep pushing prices higher, the next development is that some few people are smart enough to start selling, and before they know it, the majority of those late comers are then losing money…Not necessarily a lot perhaps, but enough such that some of them start getting nervous and also begin to sell…forcing prices even lower. Now you can begin to get into more serious losses, which encourages more selling, and “suddenly” (like in a month or two) the cumulative result is market has actually set back quite dramatically and the bull market is now headed totally in the “wrong” direction…

The key here is that the classic bull market top is accompanied by one last great swath of buyers, pushing the market into new highs…but once that last high tick has been hit, that same avalanche of buyers turns into an avalanche of sellers…

Here is picture #2…Even if you’ve never heard the term “open interest” before, I think you’ll see what I’m getting at…

Notice how that open interest came down as Gold dropped about $300 an ounce during 2008? I think the stage is set for that to happen again, with the only difference being I look for the sell off to be even bigger. I DO BELIEVE WE ARE SEEING THE HIGHS IN GOLD FOR YEARS AND YEARS, AND YEAR,  TO COME…AND IT WOULD NOT SURPRISE ME IN THE LEAST TO SEE THAT $700 FROM 2008 LOW CHALLENGED WITHIN THE NEXT 6 TO 12 MONTHS.

Here’s is the option I’d recommend at current levels…

Call if you want it…

Thanks,

Bill

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