New Interim Letter Service by Email

August 17, 1999 – When I began email subscriptions a couple of years ago, I told subscribers that they would eventually receive more than just speedy delivery. Periodic interim bulletins would also be part of the new email service.

I envisioned that these bulletins would be of two types. First, if there were important market developments, I could use the bulletin to keep subscribers informed of these developments between regular issues of the newsletter.

Second, I get a lot of good questions from subscribers, and I do try to answer all of these. Email is an efficient way to handle these questions, and if I was responding to a good question that might have general appeal to a wide readership, I asked myself why not send the response to all subscribers? Ican do so easily and efficiently by email, of course preserving the confidentiality of who asked the question.

Well, now is the ideal time to begin my new interim letter service, particularly because the market is at a very critical juncture. So herewith is my first ever Interim Letter.

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Q. I was talking to a bullion dealer, who I listen to because he unwittingly provides insight into what sort of disinformation the dealers are spreading in the market. Today, he said there are big rumors that the Germans and Italians want to sell their gold. This is obviously the next stage of the bears’ campaign. They are losing control of the market. Having lost the ability to shock and scare through the IMF gold sale proposal, or the Bank of England auctions, the shorts are going to start the next big bear raid by floating the idea of German sales. Of course sales will be completely untrue and denied as such by the Germans, but everyone will simply say “Oh well, the central banks always deny it before they do it, so it must be true.” Such is the price of lost credibility as a consequence of years of misleading statements to the markets. The Orwellian “Big Lie” strategy succeeds. I think this will be the next stage of the bears’ strategy as their desperation mounts. Any thoughts?

A. I agree with the good insight on your part. I’d like to add a couple of observations, though, because I’m not too worried about this new strategy the bears seem to be testing. Markets in time always come back to fundamentals, and the news about a market and the underlying fundamental conditions of a market are very different things.

The end of bear markets is characterized by capitulation. This capitulation comes because the weak hands get fed up with holding a losing position, and they dump it when the news reports become unbearable. Hearing all that bad news in the media is just too much for the weak hands to bear, so emotion takes over and out goes the position. They capitulate because they just can’t take it – i.e., the ongoing stress, the mounting worry, the thought of losing even more money if the price continues to slide, etc. – any longer. However, there are two corollary conclusions from this observation about the end of bear markets.

First, somebody is buying whenever anybody is selling. Although it is self-evident that for every seller there is a buyer, we sometimes forget this fact, which is unfortunate because it is always very important to understand who is doing the selling, and who is doing the buying.

Are the buyers ‘weak hands’, with sellers the ‘strong hands’? Or are ‘strong hands’ buying from the ‘weak hands’? These are very important questions.

Second, those who capitulate at the end of a bear market are the ‘weak hands’, and there is not an unlimited number of ‘weak hands’. And this last point is the important one.

The Gold market in my view has finally run out of weak hands. The buyers, who are the strong hands, are clearly taking over, and the bears do not yet understand this shift, which is one reason I think the potential here for a squeeze is very, very good. After Gold broke below $270 on the Bank of England sale news, it did not do so because of a huge influx of NEW supply.

Only 25 tonnes was sold on July 6th, which is a spit in the ocean as far as the Gold market is concerned. Rather, there was a rush of OLD supply that came on to the market, which is the metal that was shaken out from the weak hands responding to the news reports. Who were these weak hands?

A lot of people bought bullion when it was trading in the $280’s and $290’s, even the $270’s. Because this price level was historically an important chart and psychological support point, these buyers considered themselves to be strong hands, thinking Gold would never break 17-year support. However, when it did break support, these new buyers proved not to be strong hands at all. They did what all weak hands do. They sold when they heard the news reports about the Bank of England sales.

This result was predictable, and it served the purpose of the bears, both by lowering the Gold price (making their short positions more profitable) and temporarily bringing new metal into the market (which they could either borrow and then sell short or alternatively, they could buy, which would help them cover some shorts). However, that influx of metal from weak hands is drying up. The reason? Just about everyone who was destined to capitulate has by now capitulated.

Therefore, let the bears throw as many bad news reports at the market as they want, BECAUSE IT DOES NOT MATTER ANY MORE. The weak hands are out of the market, and the strong hands (who realize that the Gold price is abnormally low) are taking over. AND THE STRONG HANDS CANNOT BE SHAKEN OUT BY THESE RED HERRING NEWS REPORTS!

What matters now is the dearth of metal, and the huge short position outstanding, not some news reports about what may or may not happen in a very uncertain future. In other words, at these prices, I think the only thing that can keep the Gold price down now is for new metal actually coming into the market. The Gold price will no longer be kept down by just some news about the potential for new metal. There is a parallel here to the palladium market last year.

There was a huge short position in palladium, and these shorts regularly reported on the huge aboveground palladium stock in Russia. For awhile, these reports seemed credible and were always very intimidating, so the bears had their way. But eventually, reality of the underlying fundamental conditions within the palladium market took over.

In the absence of enough metal from Russia to prove the bears correct, money kept coming into the market to test the bears’ contention. More and more of the money was coming from the strong hands, who recognized the exceptional value that palladium offered.

Eventually, the strong hands prevailed, and the bears were sent scurrying as the palladium price rose from $135 to $400 per ounce. It was a classic squeeze, like the one that now seems to be developing in Gold, regardless what you might be reading in the mainstream media to the contrary.

One old adage about investing is that “bull markets always climb a wall of worry.” What this means is that the price climbs relentlessly higher despite all of the bad news. This action occurs because the strong hands, who understand and make their investments based on value, keep buying regardless of the news. I think Gold has begun to climb the proverbial ‘wall of worry’. I think we’re headed higher. Therefore, when it comes to markets, the Orwellian ‘big lie strategy’ has limits. And I think that limit has already been reached.

However, the key now is to let the market tell its own story. We have to watch carefully the resistance points. Gold closed above $262, albeit barely. Nevertheless, I hear some pleasant noise – with today’s close, the market is hammering another nail in the coffin of the bears.