By Julian D.W. Phillips

This is a snippet from a recent issue of the Gold Forecaster with

 Subscriber-only parts excluded.

The Gold Price and non-U.S. $ Gold prices

While the rise in the $ price of gold has been sound, without being spectacular [the rise of late has only been around 10% over the average of the last 18 months], it has barely moved in many currencies.  

With South Africa, as one of the leading gold producer’s currencies, the Rand, the gold price has hardly moved, while gold investors there have steadily built up their holdings. In that period the Rand has strengthened from a low point of around R10: U.S. $1 [October 2008], to R7.4: $1, sucking out all the benefits of a $ rise in the gold price.

In India a major gold buyer, the Rupee has risen from around Rs.48 to the present Rs.46.55: U.S. $1 a rise of 3.0% in the last month.   This has left some gain in the gold price but not sufficient a gain to deter buyers who have accepted the gold price will stay over Rs.15,000 for 10 grams of gold.   The high price itself is cutting the size of purchases, but this is a trend that has occurred all the way up the rise in the gold price.   Indian buyers do not have the same mindset as western buyers.    They are not focused on the state of the world’s money systems, only on the Rupee price of gold and their own financial security.   To them gold is better than the Rupee.

The $ has fallen against the € by 6.78% in the time it has taken the gold price to rise from $985 to $1,056 a rise of 7.2%.   And yet a very large amount of gold has been bought through London [at the Fixes] for investors from the East side of the Atlantic right through to China.   To understand the gold market fully, investors should be familiar with the London Gold Fixing.  

This is where the important price of gold is made to reflect gold demand and supply accurately, twice business day, daily.   Investors buy from retailers, who buy from wholesalers, who buy from the Bullion Banks who buy through the London Golf Fixing.  

This is where Central Banks also buy and sell, when not buying from their own local producers [they do deal in the futures markets too].   It is where Sovereign wealth funds and other major institutions acquire physical gold too.  

The London Gold Fixing

Outside COMEX the demand for gold is nowhere near as robust as across the Atlantic.   We believe that 90% of the gold traded worldwide is dealt through London and it is for physical delivery, once netted out.   In the last couple of weeks we have seen long fixing sessions, an indication of huge volumes.   Take the 19^th October, four of the members were buyers and one a seller.  

There are two Fixing sessions, one in the morning at 10.30 hrs GMT and then, to ensure inclusion of U.S. participants, one at 1500 hrs GMT. In these, the five members sit linked to each other through a dedicated conference call line, while also connected to their clients, who are kept informed of the price as it is moved in line with the buying bids and selling offers.

At the start of each fixing, the Chairman announces an opening price to the other 4 members who relay this price to their customers, and based on orders received from them, instruct their representatives to declare themselves as buyers or sellers at that price.   Provided there are both buyers and sellers at that price, members are then asked to state the number of bars they wish to trade.

If at the opening price there are only buyers or only sellers, or if the numbers of bars to be bought or sold does not balance, the price is moved and the same procedure is followed until a balance is achieved. The Chairman then announces that the price is fixed.   It should be noted that the Fix is said to balance, if the buy amount and the sell amount are within 50 bars [2000 ounces, 400 ounces each] of each other.   The Fixing will last as long as it is necessary to establish a price that satisfies both buyers and sellers.

Customers may leave orders in advance of the Fixings.   Alternatively, they may choose to be kept advised of price changes throughout the Fixing and may alter their orders accordingly at any time until the price is fixed.   To ensure that the price is not fixed before the member has had an opportunity to communicate any changes each member has a verbal flag.   As long as any flag is raised, the Chairman may not declare the price fixed.

Members

The Members are: The Bank of Nova Scotia- Scotia Mocatta, HSBC, Deutche Bank AG, London, Societe Generale Corporate & Investment Banking and Barclays Capital.   As you can see these are prime gold names globally.  

So when the SPDR gold Exchange Traded Fund buys gold for its shareholders, it buys through HSBC who holds it in its vaults for the shareholders.   In this way gold has a global but centralized market.   The price quoted at the fix is a clear measure of overall global supply and demand.

When will the Gold Price rise in All Currencies?

Indeed, for the gold price to really show its mettle, it does have to rise in all currencies.   But when that happens, it will signify a horrifying state of affairs in the monetary arena.  

Well before then, the market will, as it is doing now, discount that future time.   In centers where the gold price is not rising in the local currency, investors are fully aware that if the $ falls into decay, it will not be too long until even the strong currencies will follow.  

The only time when this will not happen is if another economic bloc can drive the global economy to the extent the U.S. economy is now.   That may well be a decade away and when Chinese is taught as a second language in most countries.   The time ahead will continue to be one of uncertainty and fear.   This will continue to drive investors in strong currency countries into gold, hopefully, while that currency remains strong.  

Beware the tendency to want to be able to measure, accurately, gold’s price against another item, such as the $.   Uncertainty and fear are often immeasurable emotions.    Perspicacious investors look ahead and buy accordingly.   That’s where we are now.   The $’s fall is symptomatic of a decay in the entire monetary system, not just the $.   The tensions that the fall of the $ will produce will impact on other nation’s Balance of Payments and on a wide range of industries.   We’ve seen it already.   But this will not be all. 

 These problems will spread to the political front and where international cooperation is needed, national interests will clash in the monetary system.   History tells us that a shift of power, military or economic, always leads to the heaviest of confrontations.   Sadly, the monetary system could well be the battleground.  

Gold will discount that future before it happens, as always.   The price will not be the accurate measure of that but the acquisition of gold and by whom will be.   At the moment the build up of gold reserves by China and Russia is the most significant of gold market actions we have seen for many years.

The Implications for the Gold Price

 For Subscribers only!   We will be sending out a review of the gold market to Subscribers only, that reveals why the gold price is being held well above $1,000.

Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter. To subscribe, please visit www.GoldForecaster.com

Legal Notice / Disclaimer

This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina only and are subject to change without notice. Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, we assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this Report.

By Julian D.W. Phillips

www.GoldForecaster.com

This is a snippet from a recent issue of the Gold Forecaster with

 Subscriber-only parts excluded.

For over more than 18 months we have watched the gold price churn below $1,000 and in the process forming three tops, before breaking out to above $1,050 in early October 2009.    Why will it not fall back to well below $1,000 and possibly as far as $850 this time?

Technical Picture

Peter has given a great deal of detail below, in this issue and has warned, precisely, of the various support and resistance levels to watch out for.   This information is critical for you, the subscriber, so as to help in your buying and selling considerations.

The U.S. $

For many months now too, while traders played the gold price against the U.S. $ the gold price has been precise in its inverse correlation to the $.   We believe that this has mistakenly led commentators to place far too much emphasis on the $, as the inverse measure of gold.  

We say this because the moves occurred at a time when many facets of the gold market were absent from the gold market, such as investment demand, low jewelry demand and central bank demand.   Traders held sway over the gold price and it is they that decided that the moves of the $: € decided the price of gold.   This lacked a reasonable basis to it.   Why should the gold price be tied to the €?   Such a relationship implies that the $ in isolation, is the most important factor in the gold market.   We counter that and say, yes COMEX is a U.S. market and such traders do have enormous pricing power, but when the full force of all sides of the gold market come into play, COMEX diminishes in importance, just as the waves of the sea are of less important than tides are, to where the sea will climb on the shoreline.  

Yes, the state of the $ is important in pricing gold and it is the ‘hub’ of the currency world, but to gaze at it alone is to ignore the much bigger world of gold in its entirety, acting together in synthesis, in deciding the gold price.

This is amply demonstrated by the fact that the U.S. $ is sitting not far off the same place, against the €, as it was when gold was just below $1,000.   We now foresee a larger de-coupling from the $ by gold, as we move forward.    Yes, the waves of the $ will ebb and flow and continue to cause traders to move the gold price against the $ as before, but the tide of investment demand and other factors in the gold market will flow and dominate these moves over time. 

Why Different this Time?

As we wrote last week, [Now available to new subscribers on request, to gold-authenticmoney@iafrica.com] while the facts of the article in the Independent [British] newspaper, informing the market that France, China, Russia and select Persian Gulf oil producers were going to price oil in a ‘new’ currency were denied, the market is convinced that this will happen in time, even if it takes another decade.   The reaction in the gold market was to bring in new investment demand via bullion itself, to prompt heavier central bank selling, to slow scrap sales and to cause traders to add some more gold to their holdings.  

On top of the consolidation phase the gold price has been going through over the last 18+ months, this was a breakout pointing to an end of that phase.   Now it sits on top of the $1,000 level, which forms a huge support to the price.  

Watershed for the Monetary System

This showed a tipping of the see-saw against confidence in the monetary system.   It was due to the realization that very little is going to be done to effectively reform the currency world and bring back stability to these markets.   More than that, it was the realization that world governments just don’t have the real political will to ensure a stable world currency system.   There are just too many conflicts of interest for them to do so.  

Meanwhile, the system decays on a broad front.   The very fact that the hub of the currency world, the U.S. $ is losing favor so quickly sends out a bigger warning to investors and the global economy.   Just take a look at what central banks have been doing in the last few months.  

Foreign currency holdings grew by $413 billion last quarter, the most since at least 2003, to $7.3 trillion.   Nations that report currency breakdowns put 63% of this new money into the € and Yen in April, May, and June.   That’s the highest percentage in any quarter with more than an $80 billion increase.   Until now China has expressed concern about the behavior of the $ alongside other nations but were hesitant to act like this, because of the damage it would do to the exchange rate of the $.   Now the realization of the fact that the $ will weaken is prompting action.

Imagine if oil was priced in a ‘basket of currencies, that diversification would be unstoppable and the $ would face a major crisis.   Now, it is only a question of when.

Some commentators are saying gold is rising because of inflation fears, but inflation is not likely to accelerate until the global recovery is strong and deflation has evaporated.   And yet gold is rising.  

What concerns foreign holders of the $ is its exchange rate.   This means far more than U.S. goods getting cheaper and European goods getting more expensive, it means the future worth of the $ in terms of all other currencies.  

e.g. If Europe sells goods to China, it prices them in the U.S. $.   The buyer and seller need to price those goods in a way that allows them to budget correctly and be able to pay correctly and make their profit on the deal.   If the U.S. $ [which has nothing to do with the underlying transaction] falls, then Europe gets less Euros to pay the supplier.   This gives a great incentive not to use the $ in these transactions.   If that trend takes off, then the $ will be used less, globally, and cause an excess of dollars to float around the system, taking it even lower.   The dollar’s 37% share of new reserves fell from about a 63% average since 1999.

The point for gold is that even central banks are wary of the U.S. $ and consequently expect uncertainty to spread like the plague through other dependent currencies, as they try to keep their exports competitive in the world market.   Despite it being money in earlier times only, gold remains the only money that can be exchanged when confidence is lost and still hold its value.   This reality is rapidly rushing at us and is why gold is rising in price.  

Need to Quantify?

Among financial professionals the need to quantify, to measure, to relate is insatiable.   Look back across the last few years of the gold market.   Gold was thought to move against oil.   This was dropped when the facts showed differently.   Gold was thought to be anti-inflationary.   While it has these properties, the price is rising in the absence of inflation at the moment.   Growth or the lack thereof was tied to gold’s performance, but when deflation hit and gold held its price that was dropped too.   In general the gold price was thought to be a tied into something in the U.S. alone.   Is this because of the myopic view of U.S. markets or is it really a reality?   Clearly, Europe and the rest of the world are involved in the gold market too.   In fact 90% of the world’s bullion is dealt in London!

So we have to counter this hunger to quantify and recognize that there are a huge number of times in our lives and our markets when reason and measurability are absent.   The gold market is reflecting one of those times right now.   When emotions creep in, many such professionals go into denial, until they can find something else to measure that emotion against.   By that time the damage has often been done.   The point of the Independent newspaper report was that it precipitated pent-up emotion against the U.S. $.   Now the $ will be seen in that negative light, not as a strong currency dominating world currencies.   It is moving to pariah status if it keeps on this road.   It is too late for political ‘spin’.  

When the Titanic sank, there was a point in time, when the ‘unsinkable’ ship in the passenger’s minds, changed to a sinking ship.   The breakout in the gold price was just such a point in time.

The Price of the $?

What has happened imperceptibly is a change in measuring value.   Until now, everything was measured in the U.S. $.   It was the ultimate measure of value for over half a century.   With uncertainty, led by global central banks, other measures of value are now needed.   Where can they be found, amongst other currencies?  

The ailments hitting the U.S. $ can affect other currencies, all of which are controlled ultimately by their central banks and governments.   If the U.S. Administration can’t hold financial confidence why should any other currency do so?   The road down for the $ will eventually lead to something that cannot be debauched by governments.   The actions of the Chinese and Russian central banks, tells us that they trust a ‘basket of currencies’ [which minimize the impact of any individual government] and, to some extent, gold.  

For years now we have said a day will come when the gold price won’t be say $1,000, but that $1,000 will be worth an ounce of gold.   We’ve arrived.

Where is the Gold Price going now?

For Subscribers only!

Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter. To subscribe, please visit www.GoldForecaster.com

Legal Notice / Disclaimer

This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina only and are subject to change without notice. Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, we assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this Report.

 

 

By Andrew Mickey, Q1 Publishing

Has Jim Rogers been reading our investment research?

Over the past few weeks we’ve been getting more and more bullish on agriculture.

October 16 – Agriculture: The Only Cheap Sector Left
October 9 – Energy and Agriculture Investing: Look Who’s Back on Board
September 27 – Investing in Agriculture Stocks: Sunspot Activity Declines Creating Opportunity

We’ve been getting excited about agriculture again partly because the markets have rebounded strongly and agriculture has been a relative laggard while the exceptionally positive long-run outlook hasn’t changed one bit.

We’re in great company too. Earlier this week investing legend Jim Rogers recently took to the online airwaves and encouraged investors to get back onto the re-emerging agriculture bull.

In an interview with Tech Ticker, Jim Rogers said:

Most agricultural products are still depressed on a historic basis.

The story is not over, not for a while.

I don't see any reason it's going to be over for a few years because no one is bringing new supply on stream.

A catastrophe is looming. The world is going to have a period when we cannot get food at any price in some parts of the world.

We couldn’t agree more.

Agriculture still has a lot of upside. It is perfectly positioned to be a safe spot to be in as countries around the world continue to debase their currencies and then there’s also the very real risk of “Agtastrophe” (trademark pending) if any crop comes in poorly.

Yesterday, I told readers of our premium investment newsletter, Andrew Mickey’s Prudent Investing:

Agriculture is going to be one of the biggest opportunities of the next decade. It’s far more important to be in agriculture rather than risk missing out by waiting for a big dip to get in at the best price.

I’m buying ag now. I plan on buying more a month from now, a year from now, and on and on. The big boom is coming and you will want to go along for the ride.

By David Morgan

At this point, I am a little reluctant to state this is the final blast-off and that we will not see gold below US$1,000 ever again. Certainly the percentages are with the precious metals investors and it seems gold has nowhere to go but up. As we know, you’re at a level that has been resistance in the past ($1,000), and that area has been resistance for gold for quite some time. And once that level is penetrated for three days in a row then you have a strong probability that the trend is going to continue. In fact, we alerted our subscribers to that very fact!

The biggest caveat is that the big, big picture is very tenuous going forward in the October/November timeframe. The powers that be seem to think that the recession is over, but the facts send a different message. Some of these concerns are as follows:

Confidence in the dollar is all we have left. Almost anyone paying attention knows the dollar has lost over 95 percent of its value. This was addressed by this writer about eight years ago in an article titled, “Dollar Dotcom”.

This faith has probably reached its limit. China, Russia, and some of the Middle Eastern countries have all expressed interest in some alternative to the U.S. dollar. Since in real terms the U.S. economy has been declining for several years, the ability for the U.S. to make good on all of the debt obligations be­comes highly questionable.

Credit seems to be contracting at a local level and exploding at a bank/financial institution level, as long as your (bank/institution) is favored by the powers in the government. Have any of you tried to get a loan on your home or apart­ment building lately? How about a loan for your small business? Credit is con­tracting on Main Street but exploding on Wall Street; this does not yield a strong economy going forward.

The U.S. government seems to be progressing into that legislation that we have kept in mind for almost 30 years—the “Monetary Control Act of 1980.” I hon­estly have not read it in many years, but to the best of my memory, this “act” provides the ability to monetize almost anything. Have some confederate cur­rency you’d like to swap for some Federal Reserve Notes? The bailout schemes are risking the integrity of the U.S. debt previously issued. This is an area to watch very closely.

Derivatives had a profound influence on bringing the system down and yet most of the derivatives in the system are still “open,” meaning these bets are not resolved at this time and the value of many is highly questionable. Deriva­tives pose one of the greatest risks to the entire banking and financial system.

Bank failures continue: the FDIC is broke and the balance sheets of many are of grave concern to investors. It is worth your time to check out the safest banks and limit your exposure!

Real estate problems are far from over, in our view. The Alt-A and even conventional mortgages have rollovers into 2010 and 2011 and are equal in size to the sub prime fiasco. This does not even consider fully what is taking place in the commercial real estate sector.

Social Security is simply a wealth-transfer scheme and I have written about it in the past. With tax revenues down, funding of this program and hundreds of other government obligations can only be funded by more borrowing—but from whom?

One of the questions we are getting quite frequently is . . .

If the recession is over officially, doesn’t that, along with the thousand-dollar gold mark, trigger inflation and suggest getting in now potentially (if you’ve been sitting on the fence about gold)?

Investors are always looking for certain signs or indicators to help with their decision-making process. This is especially true in the technical community, and more people are in the technical community today than probably ever before. That is because you have trade stations and all these software programs that anyone can buy and basically run the numbers and come up with a conclusion that gold is break­ing out. However, there are no guarantees on this; it’s only a probability. 

Deflation concerns still enter into my thinking. Looking at it as I do from a perspective of the real world, things are not really picking up. Not that there isn’t some of that going on, but it certainly isn’t widespread, and this breakout that we had is not very strong. 

The easiest thing to say with conviction is, if you’re not in this market you absolutely need to buy physical gold and silver here. Whether it stays above a thousand or drops below is a moot point. When gold goes to 2,000 or 3,000 or more, if you bought it as it broke through 1,000 and then went back under 1,000 for a while, it might make you sad for a day, a week, maybe a month . . . but it’s going much higher in the longer term. So that’s one thing to keep in mind.

Many ask, how to buy silver? Secondly, it’s the general equity market or the overall health of the financial asset market. The general market has a great influence on the mining shares, at least on a temporary basis. So that could color your view as far as what to do now. Personally, I’d be much more favorable toward buying the physical metal rather than the mining equities at this point.  

Technically, both gold and silver are overbought. The markets can stay overbought for a very long time and continue to move up and up and up in price, being over­bought the whole time. So that doesn’t concern me, as far as will it go higher or not, at this point (October 7, 2009). I do want to advise our readers that, if they’re mak­ing a decision on what to do now, be cautious. I’m very, very skeptical of what could happen in the October/November timeframe, so look out ahead. 

I was cautious last year through the end of September; that was a good call, except that it wasn’t for a long enough period. If it had been extended through the end of November, we would have gotten back in with our trading portion of the portfolio at the perfect time, in­stead of getting back in a bit too early. Regardless, that position certainly made good gains if you were in the correct mining stocks. Take a look at Silver Standard from the November low of 2008 until present time, going roughly from around the five-dollar level to over twenty. Four hundred percent on this company! Compare that with some of the junior mining companies, and not many have had that type of recovery.

Oftentimes, I am criticized for my “conservative” approach of putting serious money into a serious company. At this point, let the facts speak for themselves. No one in this market is perfect, and timing is extremely difficult but we do our best and can probably hold our own against almost anybody. However, this isn’t day-trading—I’m not a real in-and-out kind of a trader. I’m much more a position trader, where big moves down occur and no one wants to buy gold or silver anymore—that’s the time to jump on board and add to your position. Then at these highs (which we may or may not be at right now, time will tell) I’m a little bit more inclined to lighten up.

You want to sell in the strength. Very few people seem to learn that, because there’s a philosophical adherence to gold as money and silver as money, and I hold those views myself. However, I also hold the view that if you can take a profit on part of your position—which is what we do—you might as well take it, because it’s available to you.

The idea is to stay fully invested with roughly 75 percent of your funds, and to trade with about 25 percent. That is a good approach, because if the market just takes off and blasts upward from here, you still have the lion’s share of your investment and have left only 25 percent behind. Shorter-term trading with the 25 percent can make you feel good. 

Markets do move quite a bit and they are quite volatile, so when you do catch a nice move in one direction or the other, both can help you weather these long consolida­tion periods. That’s exactly what we did the last time we got a huge move up in the gold and silver price—when gold got up to the $1,000 level or actually beyond it and silver at that time was at $21.00.

I would be much more comfortable saying this is the final blast-off if silver were hitting $21.00 right now as gold is trading over $1,000—that would be confirmation in my book, and I’d be very, very bullish. Unfortunately, silver isn’t leading the charge at this time and that is acceptable. It’s certainly shown some good strength this whole year, but not quite the amount of strength I would expect if we were to see all this inflation pouring into the financial markets. Again, I still suspect that there’s probably some more recessionary, deflationary, depression type of news coming.

It is an honor to be.

Sincerely,

David Morgan
 

Mr. Morgan has followed the silver market for more than 30 years. He wrote the book Get the Skinny on Silver Investing. Much of his Web site, Silver-Investor.com, is devoted to education about the precious metals; it is both a free site and does have a members-only section. Mr. Morgan has just written a free report titled, Silver Fundamentals, Fundamentally Flawed, which can be accessed here: Free Silver Report. To receive full access to The Morgan Report, click the hyperlink.

Subscribe To The Silver Investor Today. Learn more here.
 

Disclaimer: Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Because individual investment objectives vary, this Summary should not be construed as advice to meet the particular needs of the reader. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice. Any action taken as a result of reading this independent market research is solely the responsibility of the reader. Stone Investment Group is not and does not profess to be a professional investment advisor, and strongly encourages all readers to consult with their own personal financial advisors, attorneys, and accountants before making any investment decision. Stone Investment Group and/or independent consultants or members of their families may have a position in the securities mentioned. Investing and speculation are inherently risky and should not be undertaken without professional advice. By your act of reading this independent market research letter, you fully and explicitly agree that Stone Investment Group will not be held liable or responsible for any decisions you make regarding any information discussed herein
 

By Andrew Mickey, Q1 Publishing

This article was originally published to all Prosperity Dispatch readers. Follow this link for complimentary subscription now.

There aren’t too many hard and fast rules to be a successful investor.

After all, investing successfully at times requires you to flexible or rigid, take action in a plodding or swift manner, patient or impatient, and it all depends on ever-changing circumstances.

There are a few rules, however, which can be used in any market. Below are 10 rules developed by Bob Farrell who rose to the chief market analyst spot at Merrill Lynch during his 25 year career. The rules, although developed years ago, seem tailored for the current market conditions (Pay close attention to #8 – describes what is happening right now perfectly).

Bob Farrell’s Market Rules

1) Markets tend to return to the mean over time.

2) Excesses in one direction will lead to an opposite excess in the other direction.

A Barrel of Oil: $10, 2000; $147, 2008; $40, 2009; ????, 2010 (a reasonable case could be made for $40 or $100)

3) There are no new eras — excesses are never permanent.

“These milestones reflect a new era in oil markets.” – Federal Reserve, May, 2008

“Expectations of a new era of low inflation and sustained economic growth…[was] a prime suspect for explaining the stock market developments in the second half of the 1990s.” – Bank for International Settlements, June 2001

“We are living in a new era…Stock prices have reached what looks like a permanently high plateau.” – Irving Fisher, 1929

4) Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.

How many folks missed out on this rally completely?

A recent survey by Bank of America Merrill Lynch (that never gets easier to say) found that 41% of fund managers have been “overweight” cash. Those were the only the ones who openly admitted it too.

Clearly, this market has rallied a lot higher than most everyone ever expected and, based on this rule, the rally could still have some gas left in the tank. For me, it’s still a bit too early to be betting against the market as a whole, but things like the China bubble is showing signs of weakness.

5) The public buys the most at the top and the least at the bottom.

Exhibit A:

In 1999 and 2000, money flowed into technology-focused mutual funds. At the peak of the tech bubble in March of 2000, about 80% of all money in mutual funds was in the technology funds. All of that new money pushed the NASDAQ to a peak of more than 5,000.

When the downturn came, which it always does, the leading technology mutual funds lost 60% to 80% of their value as the NASDAQ plummeted back to 1,000. And most mutual fund investors weren’t selling out along the way.

Mutual fund investors waited and waited for a rebound to come. In typical fashion, most were unwilling to give up hope and take a loss at first. However, after the NASDAQ slid lower and lower each day over the next two years, they began to sell out.

As usual, they were selling at the worst possible time. In 2002 and 2003 when the major market indices were bottoming, mutual fund outflows were at their peaks.

6) Fear and greed are stronger than long-term resolve.

How often have you held a stock simply waiting and waiting for it to move? Got bored, sold out, and moved on, and then kicked yourself for missing out on what turned out to be a big opportunity?

Don’t worry, everyone has. And we all will in the future. But there are things you can do to limit the high costs of fear and greed. The best way I’ve found is to look at risk first, then move on to potential reward, and, if the idea passes muster, develop a plan and go for it.

The preparation helps prepare you for any volatility and the plan helps keep your discipline.

7) Markets are strongest when they are broad and weakest when they narrow to a handful of blue chip names.

How weak has the market been so far in 2009? According to Rule #7 it’s very week.

In January, February, and March there were no IPOs. April saw one for $100 million. May had two for $1.0 billion. June had six in all totaling more than $2 billion.

Although it sure didn’t seem like it earlier this week, the IPO activity which creates a broader market, signals the market is actually getting stronger.

8) Bear markets have three stages — sharp down — reflexive rebound —a drawn-out fundamental downtrend.

This is how Mr. Market does his best to take most investors money away from them. He hits them once hard and by surprise. Then he lets them build confidence again slowly. He waits for the “get in now or you’ll never be able to get in this low again” crowd comes in at the end. And then a long, slow, bear market begins.

9) When all the experts and forecasts agree – something else is going to happen.

Think the recession is over?

Well, it may be technically, but there’s something a bit odd about it all though.

Last week a Wall Street Journal survey found 44 of the 45 economists who responded said the recession is already over.

Earlier today a Pew Research poll discovered “90 percent of respondents rated economic conditions as poor or ‘only fair.’”

Clearly, the “herd” is turning more bullish on the economy, but we’re still a good ways away from the euphoria which brings most investors back to stocks in a big way.

10) Bull markets are more fun than bear markets

Is it too early to start talking about the “good old days” yet?

September 2007: Oil just passed $90 a barrel. All those predictions for $200 were starting to seem “reasonable.” And your editor found himself on a Lear jet to headed to the oilfields of Alberta, Canada.

Shortly after landing, the only rational move to make was to tighten up trailing stop-losses on oil stocks and vow not to buy on any dips.

Ahhh…the good old days.

Remember, Farrell’s Rules were created by a man who experienced all the market cycles.

He started out in the booming 60s. Made it through the tumultuous 70s. Hung on for the ride throughout the mega-bull of the 80s and 90s. He didn’t completely retire until 2004 as a new mini-bull was emerging.

He has seen it all, the great bulls, bears, and a few crashes and panics. And I’m sure his 10 timeless rules undoubtedly helped him be a very successful investor. And I hope you use them to your advantage as well.

After all, learning how to become a very successful investor can be very costly. By learning these rules early on (and sticking to them) novice investors with save a fortune and experienced investors will stay more grounded. Investing is a high stakes venture and there is a lot of emotion involved and discipline needed, but the few rules that do exist, never really change at all.

Good investing,

 

Andrew Mickey
Chief Investment Strategist, Q1 Publishing