Q: I have started to read Murray Rothbard’s Man Economy and State. How does this book apply to calling the bottom in the gold market? It seems to mean that the book is all theoretical.
A: Most of what you read about supply and demand in the gold market will start with new supply from mining and end with central bank selling and leasing gold into the market. Rothbard points out that part of the demand component is the retention value existing owners place on the good they own. This is expressed as the price at which owners would rather keep the goods they own than sell. Below a certain price, existing owners value retaining a good higher than the price they can receive for selling it. This is why there are no more offers to sell when the specialist drops the price further at a market bottom. The price has dropped below existing owners’ retention value. So, for instance, let us say that all existing owners of gold value the gold that they own at $1,000 an ounce or more. If the specialist drops his bid to buy to $1,000 or less, the bid will not be filled. At that point the price can only go up. Rothbard’s work was the last attempt made by any economist to express all economic law in one book. No one else has attempted to do that since.
Q: Looks like to me that maybe the general market shares have recovered and we will not have a mass movement of capital from that source to the gold shares market. Comments?
A: We are at the inflection point on this rebound. If it goes up further from here you may be right. We will have to wait and see. If the price fads from here; then, the last of the, buy the dip, punters will have been sucked into the bear. I am not making a prediction. I will wait for the market to tell me. The market is always right.
Q: Is it possible for the gold shares market to bottom without a break in the general shares market?
A: Yes, this would happen during a crackup boom. It is also possible during a period of stagflation. However, as Martin Armstrong points out, the primary driver to push gold higher is distrust in government. The general shares market did not do well during the stagflation of the 1970s. Cycles repeat but not exactly.
Blog 30 Aug 2015
Q: How do you answer the objection that some of the mathematical models you use show rates of return that are too large to be credible.
A: I admit that is true. Models are just that. They are not intended to be predictive. They are useful in comparing alternatives. My personal experience includes compounding a $10,000 stake into $5.5m in less than a year using futures contracts and options on mining shares. I have always used just my personal funds. I have never traded for anyone else’s account. The only service I offer now is the market calls on what to buy and sell, at what price and when. I do not put in orders or accept custody of client funds. I am paid either a salary or a percent of the profits as agreed. There are many jurisdictions where this is possible without onerous requirements from autocrats.
Q: How about the client that wants full service to include putting in the trades?
A: This can, in most jurisdictions, be done through an employment agreement. The trader would then be an employee of the client’s company. Many variations are possible. I do not need to be the trader or employee. Personally, I do not put in orders even for my own account. I have staff that does that clerical function.
Q: In one of your models you get more than a billion returns on a 100k stake. Is this really helpful?
A: Yes, and I make the point that in a few short years you own all the money in the universe. Further, exchanges, like all casinos, also have limit on position sizes and there are execution problems. The important point, in my view, is the illustration that if you compounded at each five present increase in the bullion price rather the at ten percent intervals your profits would have tripled. So, trading strategy and execution are important. Compares this to the buy and hold physical gold alternative. Is this conservative approach really safer? Consider the risk that government my confiscate your gold outright or tax it to death. At the end of the day, I feel safer and more secure with more money.
Q: How do you answer the objection that I am only looking for safety?
A: I do not expect the world to be reduced to a barter economy. I think the future is bright and things will get better and better. I am optimistic. The buy and hold options conflicts with the reality of how both the financial markets and the universe function. For instance, if you hold your position at a broker or bank, they will be trading with your positions. You are exposed to the risk without getting the reward. There is only going forward, growing, or going backward, dying. All energy and matter are always in motion. The buy and hold mentality is in conflict with the basic architecture of the universe. You will get a good result only if you build your program on truthful premises. For some, the mathematical model helps to clarify their thinking. That is all I have tried to do for my reader.
Blog 31 Aug 2015
Q: Is it possible that you would call the low in the gold shares with only three of your stated four criteria?
A: It is possible. But, keep in mind that we have already had the break in the general shares market. The issue is now: will that break be mended. Even with the rebound, the current price is below the trading range of the last nine months. At this stage the margin calls have been dealt with and the dip buyers are back. It is likely that this issue will resolve itself before the last two criteria for calling the end of the bear in gold mining shares is upon us. It is never a good idea to cross a bridge before you get to it. Relax, the market will tell us all we need to know.
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]
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