My trading model just triggered a buy signal on HUI index at the Thursday closing. Going all the way back to 1996, this signal is only right about 60% of the time, but has performed well through the bear market from 1996 to 2001, and the bull market from 2001 till now.

But I still hesitate to take further positions. I don’t know whether the model is correct, or Bob Hoye is correct. I would be comfortable buying if gold makes a low at or below $850, with HUI going all the way down at 370 to 400 (or below). The current correction seems to be a little shallow, and has simply not corrected the overbought technical indicators on the monthly readings.

But again, I also believe that we were in the Elliot wave 2 of 3. Supposedly the corrections are shallow in intermediate wave 3.

Trade on your own risk. Best luck.

Frugal at 1stMillionAt33.com

I can’t believe that it will take me many many thousands of dollars of loss to bury my head into my own mathematical trading model which has told me to sell. I only wish I can trade full time.

This gold correction is definitely going to last quite a while. I guess what’s most unexpected was the duration of this previous up wave, only a mere 7 months. Now the question is where gold is going to bottom. Assuming that the previous up wave is 1 of 3 in Elliot wave, I believe the “first” bottom for gold to bottom at about $850, and HUI to bottom at 400. Gold can possibly go down to as low as $760, dragging down the entire complex way down. If it goes to $750/$760, I believe the wave count should be 5 of 1 for the most recent peak.

And very likely, precious metals won’t go anywhere for the next 9 months. Yeah, we may not see $1000 again in 2008. It’s going to be dead money.

Where should you invest your money? As I have said last week, I believe the danger zone for stock market is probably over temporarily. Of course, my own opinion is different from Frank Barbera and Bill Cara. I don’t think stock markets will break new high at all, but I believe a new low in stock market is probably not going to be in this year. Yes, we have seen the low for this year I believe. But we might not have seen a lower low yet. It’s apocalypse postponed.

On the other hand, I also don’t believe that mining stocks will go as low as Bill Cara has described. Of course, it’s only my personal opinion, based on my own count of Elliot wave.

I have taken a little long position, and closed some of my short hedges yesterday.

I have not sold much of my long positions in precious metals. I guess one of my biggest problem is that I have too much cash, which prevented me to raise more cash by selling. My total cash position is now as big as my total liquid net worth when I just started my blog, which is mainly due to my leveraging on my primary residence (through refinancing), and my relatives’ cash. Since I think more in terms of asset allocation rather than trading, I don’t want to pile up more cash. That was my problem last time when gold peaked in 2006. And I am repeating my mistake again.

Nothing beats good trading (even a good asset allocation), but only if you can repeat it time after time. Certainly, it’s a little hard to asset allocate when my cash position grows so much. Unbelievably, I’m still 50+% in cash (if I count my SHY holding as cash). Of course, that’s not any comfort for my huge loss (relative to my annual salary) in precious metals sector.

P.S. Don’t buy into the stock markets today. It should be worth your money to wait for some financial companies to go thru their earnings before you buy into the general stock market. That will also give you more time to assess this market. Furthermore, I just don’t think this stock market is going to cruise to new high this year or the next. Bottomline, you shouldn’t miss a boatload of profits even if you don’t ride on this train.

Geez, that hurts (a lot). I should have acted according to my own mathematical model.

I really thought that PM markets were in the major wave 3 in Elliot wave. Now I’m not so sure. If the recent peak is the termination of major wave 1, there will be quite a long correction before PM. And that simply doesn’t bode well for anyone looking for a continuation of the bull market.

If the recent peak is wave 1 of major wave 3 (which was my initial count), or wave 3 of major wave 3 (which is the most straightforward count, but therefore cannot be true when it’s so easy), then the correction may last less than 2 to 9 months at the longest.

I just found out that US Mint suspended or put a long delay on silver Eagles because of lots of purchase order. That is certainly not good, since public or the crowd would probably invest in coins first. I’ve also kind of kept track of the tonnes held in GLD. Before the zoom up from $910 to $925, there were about 630 tonnes. After the swan dive, at Thursday closing, there were about 637 tonnes. At the peak, there were 663 tones. The first day, 15 tonnes were withdrew. The second day (yesterday), 11 tonnes were withdrew. Apparently, it was simply billions of hot money that went in and then went out.

So is this hot money from the public? Moving at such fast speed, the most likely source is from the speculators and hedge funds rather than long term investors.

I still think that the recent peak was probably more like wave 1 of the major wave 3. However, one cannot count out the possibility of wave 5 in major wave 1, in which case, you may see PM to correct and take out the over-boughtness on the monthly charts to the long-term moving average. That will be extremely ugly to say the least.

Can the gold bull market be finished right here? I think the chance is quite slim. But again one must be open-minded at all times.

I’m going to wait for my model to turn up again before making any new purchase. I just refined my model again, and added in the commission and a few more details. It is at least outperforming index by 3X, and if I add intraday tradings, it would outperform by close to 9X (although it’s probably lower because I didn’t have 1-minute data for calculating a correct return).

I guess I was just one week earlier exactly.

Yes, gold is quite high. But yes, we are also early in the wave 3 in the Elliot wave. I believe by Elliot wave count, we are in wave 1 of wave 3, and we can enter corrective wave 2 ANYTIME.

I’ve determined my wave counts based on sentiments which I believe to be more accurate than pure wave counting. The sentiment in wave 3 from Wikipedia is here:

Wave 3: Wave three is usually the largest and most powerful wave in a trend (although some research suggests that in commodity markets, wave five is the largest). The news is now positive and fundamental analysts start to raise earnings estimates. Prices rise quickly, corrections are short-lived and shallow. Anyone looking to “get in on a pullback” will likely miss the boat. As wave three starts, the news is probably still bearish, and most market players remain negative; but by wave three’s midpoint, “the crowd” will often join the new bullish trend. Wave three often extends wave one by a ratio of 1.618:1.

Indeed, some stories that I’ve heard can be scary. There are many reports of people selling their old jewelries, increasing scrap supplies. And there are many stories of people who finally made their first purchase of gold in the $900s. But it’s in the middle of wave three, where the crowd will start to be right, meaning that people taking contrarian viewpoints will be wrong.

I will write in more details on how I reached my conclusion on the wave counts. But the bottomline is that by such wave counts, it is obvious that this gold bull market is going to last much longer than any of the “wallstreet analysts” expect.

Back on October 13, 2007, when I tried to address Wharton’s article on “Financial Innovations: A Double-Edged Sword” via BillCara’s blog, I left the following comment on his site (back in October 2007):

Wharton’s article has touched most of the important topics related to financial innovative products. There are three other things that are not addressed however:
1. Counter-party risk: the solvency of the counter-party must be considered and must be evaluated under some three-sigma events. When the tsunami comes, you don’t want to be right but still be left with the baggage from your counter-party.

2. Cross-correlation of the financial instruments: this needs to be addressed for your own portfolio and your counter-party’s portfolio if possible. The correlation and its potential variation range must be carefully considered. Using efficient frontier, one can potentially absorb high volatility and balance it (through some other negatively correlated instrument) in an entire portfolio.

3. Market efficiency: The risk of a financial product is always proportional to the return. Even if there is a temporary market inefficiency that allows one to arbitrage, such inefficiency (and therefore opportunity) is bound to disappear as the capital that participates in such opportunity expands dramatically. Such process of exploiting market inefficiency is itself making the market efficient again. So no matter how innovative the financial instruments or strategies are, one should not delude oneself into thinking that such edge can last forever.

I put counter-party risk as the most important thing. Obviously, now with Ambak and MBIA monoline insurance companies effectively bankrupt, you would have to wonder how these “prestigious” bankers and financial engineers compared to someone (me) who only took a single macro-economic class for ALL of his economics/finance training.

Well, #2 is to address over-concentration in your own portfolio and also in combination of your counter-party. This is going to be a serious problem for all banks going forward, since most of them are highly concentrated in real estate loans, whose performance is highly correlated to all sorts of credit instruments including commercial real estate loans, corporate bonds, and municipal bonds.

#3 is obviously where all the greedy wallstreet/hedge fund people have failed to even consider. The total amount of real estate loans is simply too big for a potentially safe arbitrage of interest rates between the short and long term bonds. Well, yes, certainly that short term bonds almost always pay less interest on the long term bonds. But with too many people leveraged up 10X or 20X doing the same trade, the efficient market is bound to give you a zero, if not negative return.

Now of course, the reason that I bring up these comments again is that they don’t just apply to subprime loans but to all things financial. The reason for buying physical gold and silver instead of through ETF is exactly due to #1. I’ve looked into GLD, and it seemed to be pretty safe (especially with the gold bar serial number provided). However, the same thing cannot be said for SLV, the silver ETF, which is an even thinly capitalized market. Possibly one day down the road, SLV will trade at a hefty discount to the actual silver spot price, due to counter-party blowup. The the party that’s going to be in trouble is most likely the guys with the biggest derivative books: Citibank and JP Morgan.

I don’t know how Citibank in the future will be, but it has fallen two thirds of its value, and still falling, and it still needs cash infusion. All the big banks and brokerage houses have been simply too greedy and too confident. If you simply look at their account books on Yahoo, all of them (such as Goldman Sachs, Citibank, JP Morgan) are leveraged to hilt, with LOTS of borrowed cash on their book. The total amount of cash is close to a trillion. Now, for example in Citibank, when significant percentage of the portfolio is betting on the same thing: mortgages, then everything easily come crashing down.

Financial leverage always works both ways: up and also down. In a highly leveraged portfolio, it is usually difficult if not impossible to prevent three-sigma events when sufficient number of things come crashing down. Such long term leveraged bets can only rely upon continual expansion of the credit market in saving their ass. Unfortunately, it appears that 2007 is the peak year for credit markets, which won’t recover anytime soon.

Obviously with gold price closer to $1000 than $900, if my prediction comes true, you or I shouldn’t be surprised. The best future price prediction is always the current price or whatever prices that are closer.

I think what’s going to be surprising to most market participants (myself included) is that gold may break $1000 without any “expected” pullback or fanfare. If that’s the case, it should be very bullish.

What does that mean? It would mean that the most bulls are afraid of adding more money, and the bears are nowhere to be seen. When the majority of the participants are afraid of buying, then market will probably disappoint the majority (myself included again).

Gush, I’ve got so much useless $US that I simply hate myself for not being more aggressive.

But again, this market is truly closer to a short-term top than to the short-term bottom. Near the top, great volatility is expected, and that’s exactly what we are seeing in both spot market and mining shares. Volatility is always a good indicator for a changing trend. It simply means that some smart money is getting ahead of itself.

Look at previous top in the stock market. How many big oscillations before it actually fell. Not counting the February peak, I counted 3 major upwaves, and 4 minor oscillations. That should be the nature of a major top. Granted, the coming PM top is going to be a minor PM top, so possibly it won’t be a top that is as complicated as the one happened in stock markets.

Here are my targets for the next PM top:

gold at $1130.
silver at $26.
HUI at 573.
XAU at 230.
GDX at 62.

I will reveal how I reach these numbers, but frankly, whether I arrive these numbers by the best technical analysis or exotic nonlinear mathematics, it doesn’t really matter. It’s not like if I can elaborate very well about these numbers, my “theories” will have validities. No one can ever predict the markets with very high accuracies. They are just a guess from me. And your guess can easily be better than mine.

If the intermediate trend reverses right about here, then here are my downside targets:

gold at $800.
silver at $16.
HUI at 400.
XAU at 160.
GDX at 43.5.

Obviously, if you get the direction incorrect, you will be looking at big losses.

I do NOT recommend getting into PM right now. It can FALL anytime.

Good luck trading.

Frugal at 1stMillionAt33.com

HUI made a new closing high of 485.9 today, besting the 480.99 mark set in January. The intraday high of 491.58 was also a record. With this new high, it is almost certain that we are in the middle of wave (3) of iii of 3 of III, first suggested here. In Elliott wave jargon, wave 3 is the most sustained portion of a 5 wave advance; more so for iii of 3, and so on. If this is the case, the advance of PM mining stocks in the next two months is likely to stun all but the most devout gold bugs.

Very tellingly, both ratios of HUI:Gold and Silver:Gold have been trending up which is an indication that the move in precious metals is gaining recognition and speculative fervor is brewing.

Click to enlarge>

The picture at the start purports to depict a notorious incident when the then Soviet First Secretary Khrushchev pounded the table with his shoe at a UN assembly in 1960 (Wikipedia: Nikita Khrushchev).

Gold was weak Monday on the heels of news that the Treasure department is lobbying congress to allow the IMF to sell 400 tonnes of its gold. Here’s the original Reuters report of the planned gold sale. If we look at where the potential systemic financial failures are today, we’ll come up with a handful of countries that were, let’s say, never intended to be the recipient of IMF funds when it was founded. Surely, that irony is not missed by many. Be as it may, I don’t expect the bureaucracy to call for its own demise, hence I don’t yet consider its attempt to shore up revenue by selling gold as gold price manipulation.

On the other hand, similar proposals have come before, and each time rejected by the US Congress, proving that its collective IQ is at least in the double digits. Perhaps it is even aware of the golden rule:

He who has the gold, makes the rules.

While 400 tonnes may sound like a lot (about $12 billion at current market value), its a drop in the bucket compared with central bank reserves of countries that have stated their intention to diversify away from US dollar denominated assets. Here’s a list of central bank gold holdings as a percentage of total reserves. A clear dichotomy exist between the CBs of “East” and “West”. Since the annual production of gold is a small fraction of the above-the-ground stock (a defining characteristic of monetary metal, one might add), the best way to in crease CB gold holdings is to buy from other CBs. Hence I predict that no matter how much of its gold the IMF will sell, it will find eager buyers. At the mean time, any price weakness is a gift to buyers of physical bullion.

Before I go any further, the following is based on the ASSUMPTION that gold is in a long term bull market.

Based on all the anectodal evidences that I can collect, the public simply has NOT bought into the gold’s bullish story. The public is still on the sideline, although they have definitely noticed that gold has been going strong.

I’ve talked to my uncle, my friend in the US, and my relatives in Asia. NONE of them has bought any gold. And these are people who I have REPEATEDLY told them to join onto the bandwagon. Of course, all of them have watched from sideline and claimed that gold is expensive.

There should be 3 stages of a complete bull market. In the first stage, only the smart money moves in. In this stage, markets should be traded, because they don’t go up that much. In the second stage, the public starts to join. Gradually, in this stage, contrarian opinions will be increasingly WRONG. This is the stage where you simply want to buy at the dip, and continue to accumulate. This is the stage where the opinions of the majority of the participants will start to turn out to be correct. You want to be buy and hold in this stage, and don’t get shaked out of the bullish ride. The last stage is obvious the maniac stage, where a lot of gain can be made in a short time. Contrarian opinions will be right at this stage.

I’ve read so many articles on the internet, claiming that we have begun the second stage, either from the technical charts, or because gold has started to rise against all currencies since Nov 2005. Unfortunately, it looks like this bull market is still in stage 1, or probably in the transition from stage 1 to stage 2. The public simply has not started to buy in yet. However, the recent rise from $650 to $935 appears to be the moves from smart money. I hear more stories about people selling their jewelries for cash, Indians unloading the gold for stocks, and people balking at the high price of precious metals, than the other way around.

What this means is that it may take further inflation and global currency debasement to trigger public to come in. Or that price of gold pulls back somewhat to attract more people to join, or breaking $1000 barrier to wake more people up. But one thing is for sure. For this gold bull market to continue, there MUST be more money to come in. The recent lackluster performance of mining shares is a clear indicator of lack of hot money driving up the stocks. There is only enough money driving up physical markets. A few of the senior gold companies did fine, while majority of them is still underperforming. And the junior companies simply are limping at the absolute bottom. There is a clear LACK of money or capital.

Vice versa, treasury bonds are bubblish, flushed with all the money.

The good news for bulls is that the bull market has barely begun, and there is still plenty of time to pick up your shares. The bad news is that one needs to be even more patient to wait for this bull market to unfold (if at all, or if you believe in it).

The other conclusion is obviously that for the Elliot wave technicians, they should probably go back and re-label all the waves. The longest wave 3 advancement should coincide with the increase of public participation. And it’s probably still in the (near?) future.

Frugal at My 1st Million At 33 .com