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February 1, 2010

Less is More

The first day of February was exciting for gold bugs... on paper, at least. The Docfolio recaptured one-third of its January loss in a single session, and I'm sure many of you had similar pleasures. It would be nice to see a dozen or so such days over the next couple of months. The obvious question on everyone's mind, of course, is whether today's strength marks the beginning of the big run into spring we've been anticipating. It certainly looks good. These runs typically start when things are looking most dismal, and seasonality, among many other factors, are in our favor. We have the potential for a swing high in the dollar with just a modicum of weakness tomorrow, and the gold and silver charts have already printed swing lows.

The key factor on my radar will be whether precious metals can confirm the reversal. The final phase of previous parabolic runs in PMs have all been explosive from start to finish. The parabolic run for silver in 2008, for example, saw only four instances of back-to-back down days and one instance of three consecutive days in a 10-week run. The 2006 parabolic phase did not see a single instance of back-to-back losing sessions in a nearly 2-month surge for gold and only a solitary instance for silver. We should see another strong move higher tomorrow or Wednesday to confirm a breakout.

So the game is very simple at this point. If we see strong follow-thru in coming sessions, our confidence level skyrockets. If we see today's move fail to new lows, the worry factor skyrockets. The plan of action remains the same: as soon as the dollar index posts a swing high, I will lift my long-dollar hedge in anticipation of a renewed thrust lower. As soon as the SPX posts a swing low, I will lift my short-equity hedge. The bottom line is that everything is still unfolding more or less as anticipated, so there is no reason to adjust expectations in any significant way.

I'm just going to linger in the comments section the rest of the week unless something big changes. The discussions there have been great recently. It's nice to have a relatively obscure blog with an informed reader base. It's a great example of the "less is more" philosophy. See you there.


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