[lewman]

Powayseller congrats on the gain. I recommend Zeal Intelligence if you want to understand the whys behind rise in gold & other commodities(http://www.zealllc.com/essays.htm). Wondeful thing about this website is these essays are free and easy to read, and the author does use a mix of both fundamentals (which I consider anecdotal at best) and technicals (love those charts). Specifically for gold, check out http://www.zealllc.com/2006/cpigold.htm, and for commodities in general http://www.zealllc.com/2006/21bull.htm.

To determine when to buy / hold / sell, the author uses what he calls “relativity measures”, essentially dividing an asset’s current price by its 200 day moving average and since the gold bull started in ’01 this number has mostly bounced between 0.99 and 1.14. Key thing is while it is not a sure win, your probability of success will be enhanced if you buy when this number gets near 0.99 and get out when it gets near 1.14. Now, gold’s current price is approx at 1.26 times its 200 dma. Therefore if you believe that this band (0.99 and 1.14) will continue to hold the answer to your question is sell now.

However, life is of course not that easy, pls do appreciate one fact, and that’s for this measure to go down to 0.99 or a more reasonable level, it doesn’t necessarily require gold price to drop. For example, if gold simply bounces around within a narrow band of +/- 5% for a number of months (which is what it’s doing so far since it hit the high of $645 last week), its 200 dma will eventually catch up to the current price for the relativity measure to get back towards 0.99. So the catch is if you sell now, you may not be able to get back in at a better price. And human psychology may tell you to wait for this “better price” and you end up watching gold go to $700, $800 … and you’ll hate yourself for that 🙂

The danger of selling too early was well demonstrated in the late ’90s. Remember when Alan Greenspan warned us about irrational exuberance back in … I think ’96 ? Well he was right but his timing was too early. Imagine if you got out then you would have missed some hefty stock market gains of the late 90s.

There’s a trading strategy that may alleviate that and that’s the use of trailing stops. For example, you bought gold at $600. Let’s say your comfort zone is a max loss of 20%. Then your 1st trailing stop is set at $600 – 20% or $480. Then as gold price moves up your trailing stop gets adjusted upward to always equal to -20% of the highest price but rule is once a trailing stop is set you never adjust it downward. Gold last peaked at $645 so your trailing stop should now be at $645 – 20% or around $520. From this point on, if gold drops down to $520 you sell but if it resumes its uptrend after this round of consolidation you keep moving your trailing stop upward. This will allow your profits to run … especially in times like these when arguably fundamentals have been thrown out the door albeit temporarily but with war fear there’s no telling how high it could go (what if israel does a preemptive strike on iran?). There are of course many other trading strategies but this is one I found that probably offers a good mix of allowing you to ride a bull market as much as possible without incurring too much risk.

Good luck.

[lewman]

I took a look at historical housing prices (OFEHEO) for denver (denver-auora), they seem to contradict some of the claims here:

1.75% 3.39% 6.70% 8.15% 11.33% 7.14% 5.61% 6.07% 6.59% 10.80% 13.87% 10.34% 4.95% 2.34% 3.47% 4.30%

They show the y-o-y increase since 1990 to 2005. As far as these numbers show, from ’96 to 2005, prices increased by a mere 82% (compared to the 200%+ in a number of california cities), but a correction hasn’t started to happen yet although the rise did start to slow since 2002. Also, interestingly prices have been on a continuous rise for the past 15 years.

One thing though, the area spans Denver to Aurora. I don’t know the Denver area well. Perhpas its covers too large an area for numbers to average out.

[lewman]

If you’re my age (I’m moving towards the big 4 Os) or even more senior, you may remember Japan was king in the 80s when they were supposed to soon take over the world ? Well it turned out to be one big giant stock and property bubble that once bursted it took them more than a decade to recover; and judging by the stock index it’s still a loooong way to recovery. Some scholars said the bubble was partly caused by the appreciation of the yen. And there were press stories about chinese scholars warning about not following their footsteps.

Worries over a slow down in the US economy don’t seem to be an every day topic over here. If the public is worried about that I certainly haven’t felt it or at least it’s not headline material yet.

[lewman]

Gold is risky but probably no riskier than stocks. As a student of modern portfolio theory, I tend to look at risk from a portfolio perspective. Let say 10% of your portfolio is in gold and it goes down by 10% then your portfolio loss is 1%, hopefully it will be offset by gains in your other investments (including money sitting in deposits). A real example is I put money in two hedge funds that I bought at the same time. Two years later one is down about 10% the other up 40%. So they net off to be about a 15% gain. No complains there.

Re: mining company. You’re absolutely right on that and that’s company specific risk you will face if you only invest in one company. Similar to the above, the easiest way to reduce this risk is to buy a bunch of them so if one “didn’t find any success” in mining, it will hopefully be offset by another that did. I assume you’re not into stock picking (neither am I). Take a look at stock symbol ASA which is a closed end fund that invests in a bunch of mining companies. In case you’re not aware, you buy closed end funds like you would an ETF or ordinary stock, i.e. through a broker like Schwab.

As for “hold an asset without worrying about your asset holder”, truth is there’s always going to be some exposure. However, take GLD the gold ETF as an example (or funds in general). They are generally set up such that the assets are ring fenced and held separately from the assets of the companies invovled(custodian bank, trustee, fund management company, broker,etc). If let say the fund mgt company go the way Barings did a few years back, there will be no impact on your claim to the shares of the ETF.

In general I don’t like gold buillions because of the high transaction cost. No idea how much really but I’m sure it’ll be higher than the $8 Ameritrade charges for buying the gold ETF. And you’ll probably store it in a safe deposit box then when you want to sell you have to drive down to the bank, pick them up, risk getting robbed between the bank and the shop where you can sell the bullion, etc etc. Too much trouble.

[lewman]

thanks powayseller for the nice compliments; happy to share my thoughts

I picked up 2 views of the Zeal writer that I agree to. Disclaimer: I’m not a convert because I already held the same view so understandably I’m biased.

Firstly, the Zeal writer thinks that US stock market has entered into a secular bear market that will last a number of years until valuations undershoot the other way. Check out http://www.zealllc.com/2005/longwave2.htm and at least read the 1st chart where he shows if you use PE as the judge, over time the market tends to oscillate around a mean of 14x. It last peaked at 44x before the tech bubble bursted and last trough was 6x in 1982 which was right before the greatest bull run we’ve seen in our life time so far (well, my life time anyway). Conclusion: stay away from the stock market unless you think you’ve got a winning strategy that allows you to go against the tide.

Secondly, he’s a commodity bull, which I am somewhat. For a quick summary of his view, try this article http://www.zealllc.com/2006/21bull.htm. If you have more time I also recommend reading Jim Rogers’ book Hot Commodities. Basically he thinks that we’re in a secular bull market that started around 2001, and commodity bulls usualy last something like 10, 15 years so there’s a long way to go. And one way to jump on this band wagon is to buy gold (which is probably the easiest commodity for the average joe to get into; as long as you have a stock account you can buy gold by investing in ETFs (GLD and IAU).

Re: economy. I’m somewhat undecided. Key is what the Feds will do with rates. If Ben continues raising rates, the commodity bulls could face some hiccups. If not, hard assets will go off the roof. But the tricky thing is since they stopped publishing M3, they could be doing something sneaky like continue to pump money into the system without lowering rates. So this is a tough one.

Re: investment. Bulk of my portfolio is in a few low risk asian equity hedge funds. I’ve been increasing allocation to gold since late 2004 and will continue to do so. For long only equity, the only sector I’m betting big on and will continue to add to is China (again I’m extremely biased on this one). My US stock exposure is down to single digit but no plan to totally get out yet. Am also looking to build up on foreign currencies if US rates stop increasing.

Cheers,
Lewis

[lewman]

Thanks. I think a bet on the revaluation of yuan would require patience. Interest rate differential is probably around 2% plus spread the bank charges. And from what we gather at this end, the chinese gov will resist as much as they can … so as not to follow the footstep of the japananese which allowed the yen to appreciate during the 80s that finally led to a huge bubble.

[lewman]

Unfortunatly there’s no easy way to convert USD into Yuan in a major way yet … unless you do what I do … that is move to china and make a living in yuan !

[lewman]

Thanks for posting this site.

I read through a number of articles online and found them to be very well written. I do believe that a secular bull market for commodities, especially good, has started. This information will help me fine tune my trading strategies.

I also found the newsletter written by the Aden Sisters (www.adenforecast.com) to be very helpful as well.

Lewis

[lewman]

It is quite a scary thought and I have recently started to subscribe to it as well. I recently read someone compared US to the Roman Empire … the tail end of it. And I guess it is feasible as the US has prospered through its 200+ year history. Perhaps it has come to the end of its natural life and is due a complete overhaul ?

There are a few things I personally have started doing or have at least considered. Feel free to give me your comment.

1) Gain exposure in commodities, especially gold if the fiat ccy does collapse. Check out IGE, DBC, GLD, IAU and the soon to be launched Silver and Oil ETFs, also http://www.goldmoney.com
2) Invest in hedge funds that could short the market on its way down.
3) Hold on to my house (I know this sounds strange) which I know I can pay off with relative ease so as to ensure I’ve got a roof over my head in a worst case scenario.
4) Diversify into foreign currencies … like canadian dollars which will likely stay strong, or EUR which could become another oil currency.
5) Get a job in China / India which is relatively “young” as a world power.
6) Short the housing market

[lewman]

At 2006 prospective PE of 16.5x, it can’t be considered cheap. Reason for the runup is Alan Greenspan who pushed rates way down after the tech bubble bursts. Now rates have come back up and the economy’s slowing down. And the market’s rebounded strongly since 03. One begs the question, how much more can it go ?

I’m holding on to funds I bought since 1995. But I’m not really adding to any US equities position.

[lewman]

Let’s put some numbers together and see if that’d “scare” you into action. I think it pays to ask the question “would I buy this investment ?”

Let’s assume you can rent it out rather quickly so the monthly loss is capped at $1300. We’ll also assume uncle sam doesn’t want a part of the rental income. Let say your investment horizon is 3 years and that’ll add up to a $46,800 loss. Rent may actually drop if prices do go down but hey let’s not sweat the little stuff.

Then let’s assume a relatively modest decline of 5% per year. So in 3 years time you take off another 15% x $400k = $60k.

I’m not counting your equity buildup as it sounds like you just refinanced so I assume most of the payment over the next few years goes to paying down interest anyway.

So it seems to be a pretty sure case this investment will lose $100K+ over the next 3 years, at least on paper. And that’s not counting the personal income tax increase you mentioned.

Obvious counter arguments are:
1. some of the above assumptions are wrong … sure they can be … if you flip that around your house has to gain at least 10% for the capital gain to even out the $46,800 loss … likely or unlikely ?
2. you can hold out for 20 years … but my friend, one thing that’s constant in life is there are changes. I’m happy to hear that you earn a $100K+ income and the $1300 hole per month is not an issue for now. But judging from the fact that you had to take out equity to pay off a loan with higher interests sound to me you’re not exactly sitting in a pile of cash. You didn’t say what you do for a living but if you’re like most of us there’s always a risk of losing your job, and I don’t know how old you are and whether you’re just getting into the prime years or you’re reaching the peak.

Basically, you were fortunate that the bull run in the past several years did wonders to your financial position. It’s time to take profits and get out. I would consider offering a $10K cash bonus to the buyer to get out now.

Good luck my friend.

[lewman]

Hi powayseller, just been busy at work and not been checking this site very often. Besides I didn’t come across much worth sharing so don’t want to waste the space.

Btw, CME’s finally launching housing index futures so now there’s at least a way to reduce damage without selling. Check out my other post “Now you can hedge against a property market downturn” if you’re interested.

[lewman]

Past housing price data can be found on the Chicago Mercantile Exchange. It goes back to the 70s so you can get a feel of what happened through several cycles in the past.

http://www.cme.com/trading/prd/env/housingover16250.html

[lewman]

The US auto industry has its own problems so I don’t think that’s a good yard stick. Caterpillar for instance just announced strong profits so not all companies or industries are doing poorly.

If a recession were to happen, I think one possibility is the selling of US treasuries by foreign governments. Foreign governments like China and Japan own so much treasuries, if they do decide to dump them (or buy less), it could trigger a jump in long term rates. And of course there’s the declining USD and if this trend resumes in 2006, Ben may have no choice but to raise short term rates. Then the whole yield curve could shift up, killing off business activities and cause a recession.

[lewman]

Ha ha ha powayseller I am one of those crazy people who believe in gold; I’ve now got approximately 10% of my portfolio in gold and I will build on my foreign currency portfolio starting this year as soon as rates topped out.

All the above are actually ways to profit on one single theme: the fall of the USD. I believe that as rates stabilize, market attention will once again focus on the vulnerability of the USD (twin deficits, foreign governments already having too much of their reserves in USD and need to diversify, etc). Think of gold as a “universal currency” with which you can use to hedge against the dollar’s depreciation. Alternatively, you can bet against the USD by buying CDs in foreign currencies.

You mentioned “companies that hold 1st deeds”. I’m not familiar with them. Could you tell me what they are ?

In general I don’t usually invest in stocks because I don’t have enough time to research on individual stocks.

Lewis

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