On 19th April the Shanghai Gold Exchange (SGE) began quoting a twice-daily gold-price ‘fix’ in Yuan terms. Some pundits claimed that this would give the gold price a large and sustained boost. My view was that beyond short-lived fluctuations driven by the vagaries of speculative sentiment, it was irrelevant*. It was, in my opinion, just another in a long line of distractions from gold’s true fundamental drivers.

I went on to marvel, in a blog post on 26th April, at the inconsistency of those who regularly complain about gold-market manipulation by banks and also cheered the news that the Chinese government and its subservient banks had implemented a “Yuan gold fix”.

Is the manipulation-fixated pro-China camp totally oblivious to what happened over the past 10 years? It would have to be to not realise that modern-day China has been one of the greatest forces for global price distortion the world has ever known. The idea that China could be responsible for honest price discovery for any commodity gives stupid a bad name.

Anyhow, there is no evidence that the gold price is lower than it should be considering this market’s true fundamental price drivers. Of course, to know that this is the case you have to know what the true fundamentals are. You can’t, as many gold commentators do, blindly assume that gold’s fundamentals are always bullish regardless of what’s happening in the world. If you want to be logical you also can’t determine anything useful about the gold price by analysing the shifts in gold from one location to another.

If the implementation of the “Yuan gold fix” had been followed by the price explosion that some promoters were forecasting it would have been a lucky coincidence. As things turned out, the gold price has dropped a little over the past month, which is not surprising considering the fundamentals that matter.

*In a report posted at TSI on 17th April I wrote: “…the Yuan gold fix will have no effect on gold’s true fundamentals and will therefore have no effect on gold’s intermediate-term or long-term price trends. It shouldn’t even have an effect on gold’s short-term price performance, although whether it does or not will largely depend on the vagaries of speculative sentiment.”

The following chart shows that the US$ oil price, the Canadian Dollar and the Yuan (represented on the chart by the WisdomTree Yuan Fund – CYB) have tracked each other closely over the past 15 months. When divergences have happened, they have always been quickly eliminated.

An interesting divergence has been developing over the past few weeks, with the Yuan having turned downward in mid-April, the C$ having turned downward at the beginning of May and the oil price having continued to rise. Either the currency market is wrong or the oil market is wrong. My money is on the oil market being wrong.

One reason to suspect that the oil market is wrong and that the divergence will therefore be eliminated by a decline in the oil price is recent history. In the second quarter of last year the C$ turned downward about 6 weeks ahead of the oil price and in the first quarter of this year there was an upturn in the Yuan followed by an upturn in the C$ and lastly an upturn in the oil price. That is, the currency market has been leading at turning points.

“Nobody Knows Anything” is a new book written by Bob Moriarty, the proprietor of the 321gold.com web site. It’s close to the book that I would write about investing, but Bob is a better writer than I so it is just as well that he wrote the book before I got around to it.

Achieving good returns by trading/investing in the stock market and other financial markets isn’t complicated. While a certain amount of information gathering and historical knowledge is required, achieving good returns has a lot to do with common sense. However, this doesn’t mean that it is easy. The problem is that we are most comfortable when running with the herd, but herds never have common sense and the investing herd always ends up losing money.

In the chapter on contrarian investing, Bob rightly points out that one of the keys to long-term investing success is not following the herd as it careens from one wealth-destroying blunder to the next.

Many people want to be told what the markets are going to do in the future and especially want to be given specific information about future crashes and spectacular price rises. This creates money-making opportunities for self-styled gurus.

As Bob explains in his book, there are no gurus. Nobody knows exactly when prices will rise, fall, peak and trough, but there is no shortage of people who will happily take your money in exchange for pretending to give you this extremely useful information. What these people are actually giving you are guesses dressed up to look like scientific analyses.

The fact is that in order to consistently buy low and sell high you don’t need to know, or even have an opinion about, when and at what level a market will peak or trough, but advice that helps you manage money prudently will not attract new readers/followers anywhere near as quickly as a big forecast such as “the market will peak on Date X and then plummet by 50%”. As I’ve noted in the past, there is an asymmetric risk/reward to making the big, bold forecast, because failed forecasts are soon forgotten whereas a single correct forecast (guess) about a dramatic market move can be used for promotional purposes forever.

There are many real-life examples in Bob’s book that are directly or indirectly related to the veritable industry that has grown up over the past 18 years around gold and silver manipulation. After explaining that all markets have always been manipulated, Bob delves into some of the silly stories that have been concocted and the terms that have been invented to promote the idea that the gold and silver markets have been subject to a successful multi-decade price-suppression scheme. Because it’s a fact that all financial markets are always manipulated to some extent, it is not difficult to find information that can add a ring of plausibility to a manipulation story that is not only wrong, but would be irrelevant to an investor or trader even if it were right.

Read the book to find out what Bob thinks about the “gold derivatives time bomb”, the possibility of a “commercial signal failure” in the gold market, the risk of a COMEX default, the notion that the “commercials” in the gold futures market are constantly trying to limit up-moves in the price, “naked shorts”, gold-plated tungsten bars, and the story that the 1998 Fed bailout of Long Term Capital Management (LTCM) was at least partly due to LTCM’s short position in gold.

The most important chapter in the book is probably the one titled “When to Sell”, because failing to take money off the table at an appropriate time gets many investors into trouble. Even in cases where an investor does a good job with the buy side of the equation and gets into a position where he has a large profit, dreams of the even greater profits to come will often prompt him not to sell. Instead, he hangs on…and hangs on…until eventually the large profit turns into a loss.

Bob draws on his experiences in the military (he was a fighter pilot during the Vietnam War) and in casinos to illustrate some of the points he wants to make about investing. These personal reminiscences from outside the world of investing are colourful and relevant.

At around 120 pages the book is short, but at the same time it is long on practical information. It is a stream of investing common-sense interspersed with historical examples and personal experiences. I think it would be an enjoyable read even if you aren’t involved in the financial markets, but it should be an especially enjoyable and useful read for anyone who speculates in the shares of junior gold, silver and other natural-resource companies.

This blog post is a modified excerpt from a TSI commentary published a week ago.

Among other things, good money management involves trading around a core position, with the core position being in synch with the long-term trend. In particular, during a strong intermediate-term rally it involves 1) maintaining core exposure in line with the long-term bull market and 2) methodically scaling back to core exposure as prices move sharply upward.

BOTH of the aforementioned tactics must be used to mitigate the risk of suffering a large loss AND the risk of suffering a large opportunity cost. For example, if you don’t sell anything during a strong rally then you are guaranteed to suffer a large loss once the inevitable ensuing decline occurs and you won’t have either the financial or the emotional capacity to take advantage of future buying opportunities. For another example, if you sell everything when you think that the market is close to a top then it will just be a matter of time before you find yourself on the sidelines with no exposure as prices move much higher than you ever thought possible.

In more general terms, good money management involves embracing the reality that while it is possible to measure — by looking at sentiment and momentum indicators — when a market is stretched to the upside or the downside, it is not possible to RELIABLY predict market tops and bottoms. It is not even possible to reliably identify important market tops and bottoms at the time they are happening. Fortunately, and contrary to what some self-styled gurus will tell you, achieving well-above-average long-term performance does not require the reliable prediction of tops and bottoms.

With regard to my own money management, this year’s rally in the gold-mining sector was the first rally in years that was strong enough to prompt scaling back all the way to ‘core’ (long-term) exposure. This entailed selling almost half of my total position.

I might do a small amount of additional selling if there’s another leg higher within the next few weeks, but I have built up as much cash as I want so my next big move will be on the buy side. However, I will not do any buying into extreme strength. I will, instead, wait as long as it takes for the market to reach a sufficiently depressed level, secure in the knowledge that my core exposure covers me against the possibility of ‘surprising’ additional short-term strength.