This is the most difficult of the many challenges a speculator or investor faces. If you think that you are not affected, think again. Your head is in the sand. The buy and hold for the long term does not insulate you from the effects of the cyclical nature of markets. It only camouflages the effects. The economic law that applies to market timing is: the future price is dependent on the current expectation of what a majority of market participants think it will be. Historical data is irrelevant. So called fundamentals are not a reliable guide. Events do not control human psychology. It is closer to the truth to say that human psychology controls the events.
The above referenced economic law on future price is inherent in the broader economic law: all value is subjective. For market timing, economic law clearly explains that the one and only thing you need to know is: the subjective expectation of a majority of market participants concerning what they expect that the future price will be. In every instance, the market participants will buy and sell to advance their own interests as they perceive it. If they expect that the future price will be higher, they will bid the price up to that level less the cost to carry. If they expect that the future price will be lower, they will similarly sell. This is inherent in the yet broader law of human action that people act to advance their interests as they understand and value it. The only difficulty: how to know what the subjective judgement of a majority of market participants is? Can it be measured? If so, how?
We can know what a person’s first, second and third preference is by seeing what he buys and sells. What we cannot measure is the distance between the ordinal numbers first, second and third preference. That means we cannot add, subtract, multiply or divide any economic value in order to analyse it. All value is subjective and subjective values may only be expressed with ordinal numbers. Understanding this is of great value. It permits you to confidently ignore 97% of what is written about gold. For instance: yearly gold mine production figures are largely irrelevant. They do not significantly affect the supply of gold.
The correct measure of supply includes all of the gold currently owned. At some price it may all be sold. The question comes down to: at what price. The current owners are also potential buyers. Each of them has a price at which they prefer to keep their gold rather than trade it for something else. We may refer to this as the retention price. So when the price offered fall below the retention price of all owners then no new supply is available to purchase and the bear market in gold has ended. The retention price is, like all value, a subjective judgement and varies over time. It can be expressed in ordinals. When the price of gold falls to a level such that the retention value exceeds the value that can be obtained using the proceeds of selling the gold then the price can go no lower because there will be no sellers at a lower price. This will be expressed on the exchange floors and computer screens as we have bids but no offers at that price.
Price gaps on the charts may include movements up and down. This is when the market makers and professionals close out their short positions and stop trying to find more sellers by temporarily dropping the price quoted. The specialist short covering is one of the two remaining criteria I am now looking for to call an end to the bear in gold. The other is ending wave pattern. It is a subjective confirming indicator. The two criteria, of four total, that I now, 3rd of September 2015, count as completed are extreme readings in the sentiment indicators, this is a contra indicator, and a break to the downside in the general shares market. Those two, in my judgement, we have. Specialist short covering and ending wave pattern are yet to fulfill. I will wait for the market to tell me.
Market Commentary (above) by Arthur Fixed
[box type=”info” style=”rounded” border=”full”]Commentary from Arthur Fixed the author of the Art of Speculation during Civil War – Sun Tzu Meets Jesse Livermore is a private manuscript copyrighted 2012 by Art Fixed.[/box]
Leave a Reply