Some people make things happen. Others act when they see things are happening. Still others will say: "I wonder what happened".

The average individual is more interested in ball-game scores or his/her favorite TV show, than in reading financial newspapers, or searching the Web for information, on sites such as GOLD-EAGLE.com.

Over time however, as a major trend reversal takes place, more and more 'average' individuals become aware of it, and feel compelled to act. To the extent that they have money to invest, their motivation is not to conduct proper research, but to follow the herd.

The most powerful trend in investing, at any given time, is the trend towards, or away from, items of intrinsic value. These items include real estate, commodities, such as oil and gas, collectables and especially gold and silver.

This trend continues for many years, often decades, before reversing. When the trend is away from intrinsic value, it favors paper or digital substitutes, such as bank accounts, stocks and bonds.
From 1900 till 1929 the trend favored paper.
From 1929 till 1945, gold and commodities ruled.
(For an excellent article on the importance of gold during the stock market crash of 1929, may I refer you to:
www.gold-eagle.com/editorials/great_crash.html, written by Mr. Vronsky of Gold-Eagle, … a 'must read').
From 1945 till 1965 the postwar boom favored stocks and bonds.
From 1965 till 1980, gold and commodities took center stage.
From 1980 till 2000 stocks and bonds were the place to be, thanks to high interest rates introduced by Paul Volcker, and reduced tax rates on stock investments, brought about by U.S. President Reagan.

The latest trend reversal came in 2000-2001, as central banks, led by the US Federal Reserve flooded the world with liquidity, to keep the various economies functioning, to counter the negative effects of Y2K, 9/11, LCTM, the Russian and Argentine meltdowns, etc.

"A trend in motion remains in motion until it is stopped."

The U.S. Federal Reserve is not the only bank to flood the system with liquidity. The Chinese Central Bank revealed its monetary policy for 2006, at a meeting that concluded on Jan 5/2006.

The stated goal for M1 growth is +14%, while growth for M2 is planned at +16%! They actually refer to this as 'prudence' ! Chinese M1 'only' grew at 12.7% in 2005, causing Chinese officials to fear price deflation.

The most important news to come from this policy meeting is the statement that China plans to 'OPTIMIZE THE STRUCTURE OF ITS RECORD $769 BILLION $$ FOREX RESERVES, AS IT SEEKS HIGHER RETURNS'.

Hu Xiaolian, Director of the State Administration of Foreign Exchange, stated Jan 5/06 that the agency plans to 'ACTIVELY EXPLORE WAYS OF INVESTING FOREIGN EXCHANGE MORE EFFICIENTLY'.

Zheng Xinli, Deputy Director of China's Central Policy Research Office, said that 'CHINA SHOULD INVEST ITS FOREIGN EXCHANGE RESERVES IN OVERSEAS ENERGY RESOURCES RATHER THAN US TREASURIES!' Source: www.china.com.cn/market/news/428492.htm)

Two thirds of China's FOREX reserves consists of US dollars, an amount second only to Japan's stash. No doubt China's stated intention will have a profound effect on decisions made at the other central banks, such as: the Central Bank of Japan, Great Britain and Canada. The latter sold 38 billion dollars worth of gold, during the past 15 years, and accepted US paper in exchange. The British Central Bank as recently as 2001, sold 25 tonnes of gold, when the gold price was less than half of today's price, and accepted 'paper' in return. Either these bankers did now know, or did not care, that the trend was about to change.

While no one should expect the Chinese authorities to dump their pile of US dollars all at once, it is obvious that 'change is in the wind'.

The following chart of the US dollar reveals potential weakness. The most likely interpretation is that of a bear market, interrupted by a 'counter-trend rally', that lasted most of 2005.

The next chart features the price of gold during the past 3 years. A speeding bull market.

The last chart in this article compares the price of gold with the Dow Jones Average.

The flight from paper into 'things', continues, as evidenced by the above chart. Notice the formation of a 'cup', at 46, the forming of a handle during the last 3 months of 2005 between 43 and 46, and the breakout above the handle during the past few weeks.

This is the stuff bull markets are made off. We should expect a lot of volatility. Also expect some sharp corrections. One such correction is likely due shortly, as gold is trading 19% above its 200 Day Moving Average (DMA), silver is 23% above its 200DMA, and the Hui index of unhedged gold stocks is 42% above its 200 DMA.

To ride the bull, as in rodeo, we must expect a lot of bouncing and bucking. I can remember the volatility we experienced in 1979, going into the final stages of that bull market.

My experience has taught me to buy the dips, sell a portion into the rallies, always keeping some cash on hand, as opportunities most often present themselves to those who can come up with the needed cash.

It behooves us to have an exit strategy. Whenever we make a trade, we should know in advance how much we are willing to risk on that trade. If one risks 25% of any given trade, and the transaction does not work out, the remaining 75% presents 3 more opportunities.

Then, once an investment moves up, we either take a profit here and there, or we keep moving our stops up, as we go along.

Even the cowboys, who ride bulls at the rodeo, jump off every now and then, so they can ride another bull.

To profitably ride the current bull, with the maximum of financial rewards, I like to think of my portfolio (which consists of bullion and stocks), as a rose garden. I always keep the garden in top shape, pruning here and there. Some roses turn brown and I replace them with new and exciting varieties. Sometimes my rose garden is dormant, as in winter. Never am I completely out of roses. Sometimes the garden is full, at other times there are a few empty spaces.

This resource based bull market is still very young. In 1980 the price of gold rose briefly to 850.00 an ounce. Adjusting for inflation, the gold price would have to rise to 2,100.00 to match that same level. Put a different way, today's gold price of 539.00 equals 228.00 in 1980 purchasing power. Talk about a bargain!

Happy trading!

 

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