Guerilla Investor

Bought into SLV today at 165.4188 completing my position for my revised plan. I am now invested about 97% in SLV 3% cash.

For some time now I have suspected that as the gold bull market advances the best gains will shift from one associated vehicle to another. Many gold bugs are currently heavily invested in gold mining stocks in the belief that these investments are leveraged against gold and therefore will rise even faster than gold. However close examination of events during the 70’s bull cycle suggests that this may not entirely be the case. During the 70’s gold did indeed make better gains during the first half of the cycle but were much less impressive during the later stages during golds biggest advances. This data is nicely presented in a recent article by Roland Watson. In fact the 70’s experience suggests that the performance of gold stocks is as strongly tied to the general markets performance as it is to the performance of gold. Recently this is exactly what has been seen in the current bull cycle. Mining stocks have not performed any better than gold if not worse. It appears to me therefore that the best play for the last part of this precious metals bull cycle will be silver. Silver offers an excellent leverage against gold and tends to outperform in the later stages of the cycle. Silver is also a pure metals play that is not influenced by the performance of stocks.

Another element here that greatly concerns me is that the blow off top which is probably coming in about 4 years time is likely to be a very fleeting event that happens in a flash. Just like the 1980 top that had a razor thin point and downside as steep as the upside. It suggests that gold bugs that are not prepared to time the market, or to exit early, or not positioned in vehicles that are extremely liquid, are probably going to get caught in the unpleasant aftermath. Therefore my choice of the SLV ETF.

Finally I can remember near the 1980 top when a backlash began to emerge against those who were making big money speculating on commodities. Speculator became a dirty word and even governments began to flout speculators as the villains behind high prices advocating restrictions on speculation like elimination of leverage on futures and higher capital gains taxes on PM’s. Beware the ignorant masses ready to lynch innocent scapegoats! Perhaps trumpeting investment successes in gold and silver on blogs like this one will soon be a bad idea!?

Sold off all my PM miner stocks today. Implementation of my plan is underway!

The way I calculate it this supercycle bull wave in silver has more than 90% of its upside move still to come and all of it will happen over the next four years more or less. The next few months are going to be extremely volatile and I know almost exactly what the price of silver is going to do for the rest of this supercycle. I’m not telling what it is What an incredible once in a life time opportunity!!! Let the games begin!!!

I am seriously considering switching out of all my mining stocks and going 100% into silver via the SLV ETF. The way I calculate it I have a best case additional gain of 25% in the miners compared to double that in silver over the next couple of months. So silver looks twice as good. We are quickly approaching the steeper part of the curve where silver will probably really begin to explode. The mining stocks on the other hand are relatively depressed because the entire stock market is depressed and I suspect this may continue indefinitely. However I have most of my assets in a fund that doesn’t switch out very fast so I want to time this carefully. Maybe sometime next week after a small uptick.

Using nothing more than historical prices and wave patterns I have predicted in the past that the current bull supercycle in precious metals would make an ultimate top of $6435 US for gold and $382 US for silver. Recently I have taken a completely different approach to making an approximation for a likely top using fundamentals.

My reasoning begins with the notion that price is driven largely by inflation and supply and demand (s&d). Most of the time s&d is not directly measurable and is constantly changing due to changing market conditions so any two points in time cannot be compared as being similar in this respect. There are however two exceptions to this rule. Those would be the supercycle extreme highs and extreme lows when comparatively supply and demand are in all liklihood approximately the same between any two lows or any two highs. At these points the most significant variable that has a large impact on a dollar value difference will be inflation. Inflation is a direct consequence of money supply so if we know what the change in money supply has been over the time period between successive supercycle lows or highs we should have a metric by which we could predict the price of gold at least for the extreme tops and bottoms.

To try this theory out I decided to compare two previous supercycle lows, $35 in 1970 and $255 in 1999. The increase from 35 to 255 is a factor of about 7.3X. If my theory has any credence the supply of money over the same time period should have increased by about the same 7.3 factor. Looking at government statistics for M2 money supply we can see that it increased from about 0.592 trillion in 1970 to about 4.495 trillion in 1999 when gold bottomed at $255. Calculating the money supply ratio I get 4.495/0.592 = 7.6 which is pretty close to the expected 7.3. A factor of 7.6 would have predicted a low of $266 instead of the actual $255.

Now lets take this one step further and make an estimate for the coming supercycle top! The last supercycle top occured at $873 when the money supply was at 1.483 trillion in January 1980. Lets suppose that the next supercycle top takes place in 2012. When I extrapolate the M2 money supply I get a figure of 10.89 trillion by that time assuming the money supply continues to expand at the same rate it has over the past three years. Calculating the new money supply ratio I get 10.89/1.483 = 7.34, 7.34 X 873 = $6410. So the predicted top for gold by 2012 on the basis of expanding M2 money supply is $6410. If we assume that by that time the gold/silver ratio drops to about 17 then silver would top around $380 at the same time. This kind of approximation however depends heavily on exactly when the top occurs. If it were to take instead until 2016 the calculation would give a top for gold above $10,000/oz! It also depends very much on how fast the US expands its money supply. If money supply growth accelerates over the next few years much faster than I have predicted then the actual top should be proportionately higher as well.

Recently I noticed yet another interesting symmetry in the gold price charts. Once again the golden ratio is the key. It has been pretty obvious from the historical charts of gold that each new successive wave is becoming more parabolic. From that it logically follows that the entire current supercycle should be more parabolic than the previous 70s supercycle and is therefore most comparable to the final wave of the 70s, the one that was the most parabolic. It just so happens that the recent top of 1032 is the Elliott Wave major wave 1 top which in the corresponding 70s wave 5 marked the 61.8% point of the entire wave 5. Hence I suspect that this top similarly marks approximately the 61.8% point of the current supercycle. If this proves to be true we can calculate when this wave will end by multiplying the length of the current wave 1 by 1.618. My calculations show that the end date should fall sometime in the year 2012.

In yesterdays post I pointed out the similarities so far between golds recent moves and the pattern at the 2004 top. This is exactly as we should expect since by the rule of alternation in the Elliott Wave Theory alternate tops should be comparable rather than immediately previous tops. This is also the reason that I have expected for a long time that this top will be irregular with a higher B wave and a lower low for gold as I illustrated in my March 22nd post. I first proposed this scenario in detail way back in my post on Feb. 8th.

This scenario also implied that the silver and gold waves are not in sync during this cycle and that silver’s wave 5 will top as gold achieves its wave B top. I believe that recently I have found a pattern in the price chart of silver that I was unaware of before. Is it possible that there is a hidden message in the price history that precisely foretells the future? Lets just wait and see if my forecast for the top of $33.10 before the summer of 2008 comes out to be close!

It was not too long ago that I posted a piece pointing to an ascending triangle formation in the price of gold. It was a pattern eerily similar to a pattern traced out by gold in 2004 and I suggested we might have something very similar happen again. It’s interesting to look back now and see just how accurate that assessment really was. The moral of the story: precious metals prices really do move in fractal like patterns which makes them predictable, profitable, and exciting!

This is what I predicted;

Here is my view of what gold is about to do in the coming months.