goldeditor : charting gold for dummies - an interview with reinhard goldeditor : charting gold for dummies - an interview with
reinhard
www . goldeditor . com
this week gold broke out to new 16
year highs - a great time to get our favorite technical guru , richard
reinhard , editor of growth
stocks weekly , to give us some of his thoughts on the price of gold ( i
know , expectations only cause heartbreak ) . goldeditor interviewed reinhard
and he explains in simple detail the mega trend bullishness on gold from a
technical point of view . ( don ' t ask him on the fundamentals - he could go on
forever ) . sit down in front of the fire and enjoy :
goldeditor :
why do you emphasize charting , aka technical analysis , when
making your investment decisions ?
reinhard :
technical analysis separates emotions from logic . if we all
have the same completely logical expectations prices would only change when
quarterly reports or relevant news was released . this would make investing
easy .
technical analysis ( ta ) is the process of analyzing a
security ' s historical prices in an effort to determine probable future
prices . we compare current price action ( current expectations ) with
comparable historical price action to predict a reasonable outcome .
only a small minority of technicians can consistently and
accurately determine future prices . however , even if you are unable to
accurately forecast prices , technical analysis can be used to consistently
reduce your risks and improve your profits .
the price of a security represents a consensus - one person
is buying and another is selling . the price at which an investor is willing
to buy or sell depends primarily on his expectations . if he expects the
security ' s price to rise , he will buy it ; if the investor expects the price
to fall , he will sell it . ta is based almost entirely on the analysis of
the resulting price and volume as evidenced via a chart . a picture truly is
worth a thousand words .
think of security prices as the result of a head - to - head
battle between a bull ( the buyer ) and a bear ( the seller ) . the bulls push
prices higher and the bears push prices lower . the direction prices
actually move reveals who is winning the battle .
support and resistance areas form where strong
emotions occur , and can be penetrated by a change in investor
expectations ( a shift of the supply / demand lines ) . this type of a change is
often abrupt and news based , and often emotional .
a trend represents a consistent change in prices ( changing
investor expectations ) . trends differ from support / resistance levels in
that trends represent change , whereas support / resistance levels represent
barriers to change .
the use of ta , essentially observing the clues and actions
of the crowd , allows you to divorce yourself from what
they are feeling . somewhat clinically , you are in a position to
anticipate their actions and so act either ahead , with or counter to the
crowd - providing a much more timely ( higher probability ) basis for
investment decisions .
ta provides a basis or frame of reference using a logical
and consistent approach that minimizes risks and maximizes opportunities .
most investors spend their time looking for easy money ( which is not an
easy search ) instead of learning the key factors to security prices - - supply
and demand .
goldeditor :
what are some different technical indicators you use , what
do they measure and how do you interpret them ?
reinhard :
moving averages are one of the oldest and most popular
technical analysis tools representing the average price of a security at a
given time . many other indicators exist that are beyond a simple
explanation , including several of our favorites : fibonacci retracements ,
relative strength index and on - balance - volume . any good book on ta will
explain these clearly to students of the markets .
basically , there are three distinct types or classes of
indicators , which provide insight into :
1 . the external
monetary conditions affecting security prices . this tells us what security
prices should do .
2 . the sentiment of
various sectors of the investment community . this tells us what investors
expect prices to do .
3 . the current
momentum of the market . this tells us what prices are actually doing .
goldeditor :
what are your thoughts on the mega trend in the us dollar ?
reinhard :
the us dollar is in a secular bear market . you can ' t open a
financial newspaper or watch the financial news channels without hearing
about the dollar bear . this trend became technically apparent in early
2002 , just like the mirror - image gold price lift - off , yet the press
typically provided little if any coverage .
with the us dollar ( $ us ) index finally breaking 85 support
in recent weeks and gold breaking through the us $ 430 - 435 resistance , we are
now clearly starting the next big upwave on gold . the markets are looking
somewhat like a rabbit in the road staring at oncoming headlights - frozen
in disbelief , fear or confusion . the lag in the gold stocks is symptomatic
- but once the trends accelerate away from these key resistance ( gold ) /
support ( $ us ) areas there will likely be a rush by the undecided -
resulting in an accelerating trend that will surprise the mainstream .
there are several technical reasons and many fundamental
reasons why a major $ us interim bottom isn ' t likely here and the trend is
nowhere near approaching its ultimate end . technically the us dollar index
is trading high up in its downtrend near resistance with overhead
resistance now building a wall . to see this graphically visit www . gsweekly . com
of course the dollar needs to periodically bounce or that
fear would get out of hand . technical bounces are a normal part of major
downlegs , bleeding off excessive fear and rebalancing investor sentiment .
but make no mistake about it , we seeing a slow - motion crash
of the us dollar . key to remember is that all major commodities are
denominated in us dollars , the world ' s de facto reserve currency . if the
dollar is falling , you need more dollars to buy oil or wheat or steel or
any commodity . commodity prices across the board are responding to the
dollar ' s weakening , but gold has a particularly strong correlation as it is
effectively a currency alternative .
gold has broken out to 16 - year highs and other metals are
following suit . aluminum is selling at multi - year highs , as is copper ,
lead , silver and nickel . grain prices are surging . if we ' re right about the
long - term direction of the dollar ( does it have any choice ? ) , these gains
are just the beginning .
click here for a usd
index chart
goldeditor :
can you simplify the long term
technical story behind gold ?
reinhard :
in the late ' 90 s gold sank below $ 260 an ounce as the dow
headed over 12 , 000 . this was in hindsight the best possible time to leave
the roaring tech - boom party and reposition for what will likely be
considered the trade of the decade - buy gold . one problem - there was no
one ringing the bell that gold had hit an historic bottom !
then in april 2001 gold hit a 21 - year low near $ 250 , very
similar to the lows of 1999 , thereby forming a double - bottom . sentiment was
understandably negative , with headlined high - profile central bank
sell - offs , and predictions of sub - $ 200 gold . as is fairly typical , gold
chose its darkest hour to turn into a new secular bull market only now
starting to get some mainstream recognition .
it ' s easy to focus on the day - to - day ripples , but it ' s the
intermediate waves and the secular direction of the tide that really
determines where the big money is made , and this big picture perspective
continues to set the tone for our somewhat unique early - stage ,
well - pedigreed , small - cap resource - sector investment focus .
ta monitors supply and demand - the key elements that
determine price . as long as demand exceeds supply , prices will rise over
the long term . the fun to be had is when this equilibrium price is a fair
ways away from the status quo , and for many reasons i believe this to be
the case .
global gold supply only grows incrementally each year
because of the difficulty and huge capital costs required to bring new gold
deposits to market . gold is a relatively small market where a demand shift
leads to magnified price adjustments , especially because unlike a typical
commodity , gold is a unique store of value .
the key to any secular gold bull is the demand or supply
that private investors generate as they buy or sell gold , as this market
represents about 80 % of gold ownership . the collective gold transactions of
millions or even billions of individual investors worldwide buying and
selling gold will ultimately set the price .
perversely , in the investment world the higher the price an
investment climbs the greater demand becomes . virtually no one wanted
anything to do with gold near $ 250 a few years ago , but anyone around in
late 1979 through to january 1980 witnessed the madness of the crowd as
gold rapidly accelerated to its peak at over $ 850 per ounce .
the key to understanding any market bubble ' s distinct
parabolic curve is to understand the shifting investment demand over the
life of a secular bull . the higher the investment price , the more attention
it attracts , the higher demand grows , the higher the investment price goes
- a virtuous circle .
gold is ultimately a store of value , money , so far simply
appreciating to counter the devaluing us dollar . many currencies such as
the euro and the commodity - based canadian dollar are also appreciating
strongly relative to the us dollar . when gold starts appreciating from the
foreign investors ' home - currency perspective , maybe as a result of their
government ' s determination to remain competitive through competitive
devaluation or a lowering of interest rates , the rush to own gold should
accelerate .
click here for a three
year gold chart
goldeditor :
so many people have said that gold ' s critical level is $ 430
- why is that ?
reinhard :
gold has often been repulsed by overhead supply at this
price point , although the number $ 430 has no particular significance other
than to be well north of where resistance is usually met . just earlier this
year enthusiastic gold investors were financially bagged when gold ' s
largely uninterrupted run from the january 2001 $ 250 area double bottom
came to an abrupt halt on january 13 2004 at $ 426 , corrected to $ 390 , ran
again to $ 427 in april ( a double top ! ) and then plunged to the $ 375 area in
short order . this of course caused magnified volatility amongst the junior
gold stocks .
looking back further , this is the same area that marked the
january 1996 peak , january 1990 top , january 1987 resistance and even the
late 1979 correction before the breakout to the ultimate $ 850 secular peak .
for whatever reason , demand seems to meet supply in this area , and of
course the market ' s always right !
on october 25 , 2004 gold closed at $ 429 , to me a key close
and the highest since february 1990 ' s high close of $ 424 . interestingly ,
gold has barely pulled back at all these last 3 weeks ( the low was $ 424 on
2 days ) and in fact has been trading consistently above $ 430 with
progressively higher closes since november 4 . today ' s close ( november 16 )
was $ 439 . 40 . can you spell stealth breakout ?
goldeditor :
is $ 430 the big support level now ?
reinhard :
the $ 425 area has built up significant support over the last
month . any significant breakdown through the area would of course be a cold
shower for the gold market , causing no small amount of painful readjustment
to some leveraged portfolios as offside investors liquidate .
interestingly , this is not an extended , over - bought market .
in fact , many traders and gold bugs would have faded into this
key resistance zone - that is , sold as price entered the resistance area .
this is the reason old resistance becomes new support once breached
decisively . trader ' s remorse is a well - known phenomenon . market
traders who sold and investors who missed the run are now even more anxious
to ( re ) establish positions , hoping to see price come back , and afraid to
chase the price up .
goldeditor :
has gold broken out for good ?
reinhard :
yes . gold has now broken out and is on a trend that is
unlikely to change for some time . the trend remains intact until it is
broken . right now from both a fundamental and technical perspective i ' m
convinced that we are setting up for a run to test the $ 480 - 500 area .
goldeditor :
where do you think the next major resistance level is ?
reinhard :
a re - visit to gold ' s long term chart shows that once the
$ 430 area is cleared next resistance will be met at around $ 500 , and above
that it ' s about $ 720 . again , this is historical and based on several
distinct data - points separate in time , lending some confidence to each
level ' s ongoing significance . $ 500 also has that large round
number psychological aspect to it .
goldeditor :
how does investor psychology affect charting patterns and
technically ?
reinhard :
some key observations investors need to consider :
1 . price represents
the fair market value as agreed between buyers ( bulls ) and sellers ( bears ) .
2 . changes in price
are the result of changes in investor expectations of the security ' s future
price .
3 . support levels
occur when the consensus is that the price will not move lower . it is the
point where buyers outnumber sellers .
4 . resistance levels
occur when the consensus is that the price will not move higher . it is the
point where sellers outnumber buyers .
5 . the penetration of
a support or resistance level indicates a change in investor expectations
and a shift in the supply / demand lines .
6 . volume is useful in
determining how strong the change of expectations really is .
7 . traders ' remorse
often follows the penetration of a support or resistance level as prices
retreat to the penetrated level . which means what ? the sellers feel stupid
for having sold and want back in !
goldeditor :
technically speaking where do you think the critical level
is for gold to hold for the bull market remain intact ?
reinhard :
if one looks at the 4 - year chart , effectively covering the
double - bottom of early 2001 and the full move of this first phase of what
is now a new secular bull market , a clear channel can be plotted which
bounds the higher - lows and higher - highs with parallel up - trend lines .
today , to break the bottom trend line we would need to see price break down
through the $ 390 area , and then there still exists major support at the old
resistance band around the $ 375 level . a break in the established uptrend
would not negate the bull market , but a breakdown through major support
would put it in jeopardy - effectively the lows of april 2004 would need to
be breached to the downside .
goldeditor :
why are some of the gold stocks not breaking out with the
price of gold ?
reinhard :
actually very few gold stocks are breaking out or achieving
new highs along with the price of gold . there are probably several reasons
for this , but a major one has to be investor ' s reluctance to buy when price
is perceived to be at the top of a trading range - a been there , done
that , won ' t do that again psychology . this will change once the gold
price leaves this range behind and investors start to believe there ' s
upside . a once bitten twice shy memory is strong - fear will
need to be overcome by greed .
another factor to consider is that there was a record amount
of financings last year as long - suffering juniors took advantage of the first
wave to load up the treasury at relatively cheap prices . there ' s a lot of
paper that needs to be absorbed . the hui gold share index has gained about
600 % over the last 3 - 1 / 2 years and most investment managers and retail
brokers missed the market . typically any bull market ' s first phase is
marked by denial and this one is no different . by the time phase two
progresses to the point that average people start to become aware and
accept that this is for real , we should see some serious professional
capital to inflow to the sector .
once the senior companies do become fully or overvalued in
anticipation of gold ' s continued rise , there will be a natural migration of
investment capital to the undervalued intermediate and then junior sectors .
because it takes three to five years to find a decent discovery , and
another several years to build a mine - there ' s no quick way to catch up
for the lack of exploration and development of the 1997 - 2002 resource
slump , and so to position into perceived value will mean buying into
deserving early - stage opportunities now , or pay - up down the road . resources
are now scarce , and the competition from investors , funds , mining companies
and foreign countries will only become more intense until somehow supply
increases to the point where demand is met - and this is unlikely to occur
for several years .
goldeditor :
do you buy strictly on technical behaviors or do you combine
technical behavior with fundamentals and why ?
reinhard :
you need both . there have been many scams and market
manipulations where the technicals were orchestrated to be compelling .
likewise , the fundamentals are often manipulated ( remember bre - x ) in an
effort to deceive . at least with bre - x the technicals would have stopped
you out even as the story remained compelling . it ' s never a good idea to
ignore one entirely , although if i had to make a choice , technical analysis
and good money management discipline is all one needs to make consistent
returns .
goldeditor :
what is your biggest trading rule ? ( i . e . never average down ,
first loss is always the best lost etc . )
reinhard :
a rising tide raises all ships , and vice versa , so assess
the tide , not the ships .
some honorable mentions that have served me well : be
patient : don ' t be rattled by fluctuations .
when all you ' re left with is hope , get out .
never catch a falling knife .
cut your losers , and let your winners ride .
bear markets begin in good times . bull markets begin in bad times .
draw trendlines . if a stock is in a downtrend don ' t go long , and visa
versa .
if you learn one candlestick pattern , learn doji at the top of a trend .
contrarians are correct at turning points in the market , but wrong the rest
of the time .
goldeditor :
what books do you recommend for the beginning trader ?
reinhard :
technical analysis of the financial markets : a comprehensive
guide to trading methods and applications by john j . murphy
trading for a living : psychology , trading tactics , money management
by alexander elder financial reckoning day : surviving the soft
depression of the 21 st century by william bonner
reminiscences of a stock operator by edwin lefvre
goldeditor :
richard , thank you for your insights on the price of gold .
i ' m sure your technical expertise has helped many of our subscribers be
better investors . we are going to do an update with you in six months . we
look forward to talking to you then .
to unsubscribe from this publication , please click on the
box below .
gold editor po box 48451 bentall centre vancouver , bc v 7 x la 2 canada
goldeditor : charting gold for dummies - an interview with reinhard
goldeditor : charting gold for dummies - an interview with
reinhard
www . goldeditor . com
this week gold broke out to new 16
year highs - a great time to get our favorite technical guru , richard
reinhard , editor of growth
stocks weekly , to give us some of his thoughts on the price of gold ( i
know , expectations only cause heartbreak ) . goldeditor interviewed reinhard
and he explains in simple detail the mega trend bullishness on gold from a
technical point of view . ( don ' t ask him on the fundamentals - he could go on
forever ) . sit down in front of the fire and enjoy :
goldeditor :
why do you emphasize charting , aka technical analysis , when
making your investment decisions ?
reinhard :
technical analysis separates emotions from logic . if we all
have the same completely logical expectations prices would only change when
quarterly reports or relevant news was released . this would make investing
easy .
technical analysis ( ta ) is the process of analyzing a
security ' s historical prices in an effort to determine probable future
prices . we compare current price action ( current expectations ) with
comparable historical price action to predict a reasonable outcome .
only a small minority of technicians can consistently and
accurately determine future prices . however , even if you are unable to
accurately forecast prices , technical analysis can be used to consistently
reduce your risks and improve your profits .
the price of a security represents a consensus - one person
is buying and another is selling . the price at which an investor is willing
to buy or sell depends primarily on his expectations . if he expects the
security ' s price to rise , he will buy it ; if the investor expects the price
to fall , he will sell it . ta is based almost entirely on the analysis of
the resulting price and volume as evidenced via a chart . a picture truly is
worth a thousand words .
think of security prices as the result of a head - to - head
battle between a bull ( the buyer ) and a bear ( the seller ) . the bulls push
prices higher and the bears push prices lower . the direction prices
actually move reveals who is winning the battle .
support and resistance areas form where strong
emotions occur , and can be penetrated by a change in investor
expectations ( a shift of the supply / demand lines ) . this type of a change is
often abrupt and news based , and often emotional .
a trend represents a consistent change in prices ( changing
investor expectations ) . trends differ from support / resistance levels in
that trends represent change , whereas support / resistance levels represent
barriers to change .
the use of ta , essentially observing the clues and actions
of the crowd , allows you to divorce yourself from what
they are feeling . somewhat clinically , you are in a position to
anticipate their actions and so act either ahead , with or counter to the
crowd - providing a much more timely ( higher probability ) basis for
investment decisions .
ta provides a basis or frame of reference using a logical
and consistent approach that minimizes risks and maximizes opportunities .
most investors spend their time looking for easy money ( which is not an
easy search ) instead of learning the key factors to security prices - - supply
and demand .
goldeditor :
what are some different technical indicators you use , what
do they measure and how do you interpret them ?
reinhard :
moving averages are one of the oldest and most popular
technical analysis tools representing the average price of a security at a
given time . many other indicators exist that are beyond a simple
explanation , including several of our favorites : fibonacci retracements ,
relative strength index and on - balance - volume . any good book on ta will
explain these clearly to students of the markets .
basically , there are three distinct types or classes of
indicators , which provide insight into :
1 . the external
monetary conditions affecting security prices . this tells us what security
prices should do .
2 . the sentiment of
various sectors of the investment community . this tells us what investors
expect prices to do .
3 . the current
momentum of the market . this tells us what prices are actually doing .
goldeditor :
what are your thoughts on the mega trend in the us dollar ?
reinhard :
the us dollar is in a secular bear market . you can ' t open a
financial newspaper or watch the financial news channels without hearing
about the dollar bear . this trend became technically apparent in early
2002 , just like the mirror - image gold price lift - off , yet the press
typically provided little if any coverage .
with the us dollar ( $ us ) index finally breaking 85 support
in recent weeks and gold breaking through the us $ 430 - 435 resistance , we are
now clearly starting the next big upwave on gold . the markets are looking
somewhat like a rabbit in the road staring at oncoming headlights - frozen
in disbelief , fear or confusion . the lag in the gold stocks is symptomatic
- but once the trends accelerate away from these key resistance ( gold ) /
support ( $ us ) areas there will likely be a rush by the undecided -
resulting in an accelerating trend that will surprise the mainstream .
there are several technical reasons and many fundamental
reasons why a major $ us interim bottom isn ' t likely here and the trend is
nowhere near approaching its ultimate end . technically the us dollar index
is trading high up in its downtrend near resistance with overhead
resistance now building a wall . to see this graphically visit www . gsweekly . com
of course the dollar needs to periodically bounce or that
fear would get out of hand . technical bounces are a normal part of major
downlegs , bleeding off excessive fear and rebalancing investor sentiment .
but make no mistake about it , we seeing a slow - motion crash
of the us dollar . key to remember is that all major commodities are
denominated in us dollars , the world ' s de facto reserve currency . if the
dollar is falling , you need more dollars to buy oil or wheat or steel or
any commodity . commodity prices across the board are responding to the
dollar ' s weakening , but gold has a particularly strong correlation as it is
effectively a currency alternative .
gold has broken out to 16 - year highs and other metals are
following suit . aluminum is selling at multi - year highs , as is copper ,
lead , silver and nickel . grain prices are surging . if we ' re right about the
long - term direction of the dollar ( does it have any choice ? ) , these gains
are just the beginning .
click here for a usd
index chart
goldeditor :
can you simplify the long term
technical story behind gold ?
reinhard :
in the late ' 90 s gold sank below $ 260 an ounce as the dow
headed over 12 , 000 . this was in hindsight the best possible time to leave
the roaring tech - boom party and reposition for what will likely be
considered the trade of the decade - buy gold . one problem - there was no
one ringing the bell that gold had hit an historic bottom !
then in april 2001 gold hit a 21 - year low near $ 250 , very
similar to the lows of 1999 , thereby forming a double - bottom . sentiment was
understandably negative , with headlined high - profile central bank
sell - offs , and predictions of sub - $ 200 gold . as is fairly typical , gold
chose its darkest hour to turn into a new secular bull market only now
starting to get some mainstream recognition .
it ' s easy to focus on the day - to - day ripples , but it ' s the
intermediate waves and the secular direction of the tide that really
determines where the big money is made , and this big picture perspective
continues to set the tone for our somewhat unique early - stage ,
well - pedigreed , small - cap resource - sector investment focus .
ta monitors supply and demand - the key elements that
determine price . as long as demand exceeds supply , prices will rise over
the long term . the fun to be had is when this equilibrium price is a fair
ways away from the status quo , and for many reasons i believe this to be
the case .
global gold supply only grows incrementally each year
because of the difficulty and huge capital costs required to bring new gold
deposits to market . gold is a relatively small market where a demand shift
leads to magnified price adjustments , especially because unlike a typical
commodity , gold is a unique store of value .
the key to any secular gold bull is the demand or supply
that private investors generate as they buy or sell gold , as this market
represents about 80 % of gold ownership . the collective gold transactions of
millions or even billions of individual investors worldwide buying and
selling gold will ultimately set the price .
perversely , in the investment world the higher the price an
investment climbs the greater demand becomes . virtually no one wanted
anything to do with gold near $ 250 a few years ago , but anyone around in
late 1979 through to january 1980 witnessed the madness of the crowd as
gold rapidly accelerated to its peak at over $ 850 per ounce .
the key to understanding any market bubble ' s distinct
parabolic curve is to understand the shifting investment demand over the
life of a secular bull . the higher the investment price , the more attention
it attracts , the higher demand grows , the higher the investment price goes
- a virtuous circle .
gold is ultimately a store of value , money , so far simply
appreciating to counter the devaluing us dollar . many currencies such as
the euro and the commodity - based canadian dollar are also appreciating
strongly relative to the us dollar . when gold starts appreciating from the
foreign investors ' home - currency perspective , maybe as a result of their
government ' s determination to remain competitive through competitive
devaluation or a lowering of interest rates , the rush to own gold should
accelerate .
click here for a three
year gold chart
goldeditor :
so many people have said that gold ' s critical level is $ 430
- why is that ?
reinhard :
gold has often been repulsed by overhead supply at this
price point , although the number $ 430 has no particular significance other
than to be well north of where resistance is usually met . just earlier this
year enthusiastic gold investors were financially bagged when gold ' s
largely uninterrupted run from the january 2001 $ 250 area double bottom
came to an abrupt halt on january 13 2004 at $ 426 , corrected to $ 390 , ran
again to $ 427 in april ( a double top ! ) and then plunged to the $ 375 area in
short order . this of course caused magnified volatility amongst the junior
gold stocks .
looking back further , this is the same area that marked the
january 1996 peak , january 1990 top , january 1987 resistance and even the
late 1979 correction before the breakout to the ultimate $ 850 secular peak .
for whatever reason , demand seems to meet supply in this area , and of
course the market ' s always right !
on october 25 , 2004 gold closed at $ 429 , to me a key close
and the highest since february 1990 ' s high close of $ 424 . interestingly ,
gold has barely pulled back at all these last 3 weeks ( the low was $ 424 on
2 days ) and in fact has been trading consistently above $ 430 with
progressively higher closes since november 4 . today ' s close ( november 16 )
was $ 439 . 40 . can you spell stealth breakout ?
goldeditor :
is $ 430 the big support level now ?
reinhard :
the $ 425 area has built up significant support over the last
month . any significant breakdown through the area would of course be a cold
shower for the gold market , causing no small amount of painful readjustment
to some leveraged portfolios as offside investors liquidate .
interestingly , this is not an extended , over - bought market .
in fact , many traders and gold bugs would have faded into this
key resistance zone - that is , sold as price entered the resistance area .
this is the reason old resistance becomes new support once breached
decisively . trader ' s remorse is a well - known phenomenon . market
traders who sold and investors who missed the run are now even more anxious
to ( re ) establish positions , hoping to see price come back , and afraid to
chase the price up .
goldeditor :
has gold broken out for good ?
reinhard :
yes . gold has now broken out and is on a trend that is
unlikely to change for some time . the trend remains intact until it is
broken . right now from both a fundamental and technical perspective i ' m
convinced that we are setting up for a run to test the $ 480 - 500 area .
goldeditor :
where do you think the next major resistance level is ?
reinhard :
a re - visit to gold ' s long term chart shows that once the
$ 430 area is cleared next resistance will be met at around $ 500 , and above
that it ' s about $ 720 . again , this is historical and based on several
distinct data - points separate in time , lending some confidence to each
level ' s ongoing significance . $ 500 also has that large round
number psychological aspect to it .
goldeditor :
how does investor psychology affect charting patterns and
technically ?
reinhard :
some key observations investors need to consider :
1 . price represents
the fair market value as agreed between buyers ( bulls ) and sellers ( bears ) .
2 . changes in price
are the result of changes in investor expectations of the security ' s future
price .
3 . support levels
occur when the consensus is that the price will not move lower . it is the
point where buyers outnumber sellers .
4 . resistance levels
occur when the consensus is that the price will not move higher . it is the
point where sellers outnumber buyers .
5 . the penetration of
a support or resistance level indicates a change in investor expectations
and a shift in the supply / demand lines .
6 . volume is useful in
determining how strong the change of expectations really is .
7 . traders ' remorse
often follows the penetration of a support or resistance level as prices
retreat to the penetrated level . which means what ? the sellers feel stupid
for having sold and want back in !
goldeditor :
technically speaking where do you think the critical level
is for gold to hold for the bull market remain intact ?
reinhard :
if one looks at the 4 - year chart , effectively covering the
double - bottom of early 2001 and the full move of this first phase of what
is now a new secular bull market , a clear channel can be plotted which
bounds the higher - lows and higher - highs with parallel up - trend lines .
today , to break the bottom trend line we would need to see price break down
through the $ 390 area , and then there still exists major support at the old
resistance band around the $ 375 level . a break in the established uptrend
would not negate the bull market , but a breakdown through major support
would put it in jeopardy - effectively the lows of april 2004 would need to
be breached to the downside .
goldeditor :
why are some of the gold stocks not breaking out with the
price of gold ?
reinhard :
actually very few gold stocks are breaking out or achieving
new highs along with the price of gold . there are probably several reasons
for this , but a major one has to be investor ' s reluctance to buy when price
is perceived to be at the top of a trading range - a been there , done
that , won ' t do that again psychology . this will change once the gold
price leaves this range behind and investors start to believe there ' s
upside . a once bitten twice shy memory is strong - fear will
need to be overcome by greed .
another factor to consider is that there was a record amount
of financings last year as long - suffering juniors took advantage of the first
wave to load up the treasury at relatively cheap prices . there ' s a lot of
paper that needs to be absorbed . the hui gold share index has gained about
600 % over the last 3 - 1 / 2 years and most investment managers and retail
brokers missed the market . typically any bull market ' s first phase is
marked by denial and this one is no different . by the time phase two
progresses to the point that average people start to become aware and
accept that this is for real , we should see some serious professional
capital to inflow to the sector .
once the senior companies do become fully or overvalued in
anticipation of gold ' s continued rise , there will be a natural migration of
investment capital to the undervalued intermediate and then junior sectors .
because it takes three to five years to find a decent discovery , and
another several years to build a mine - there ' s no quick way to catch up
for the lack of exploration and development of the 1997 - 2002 resource
slump , and so to position into perceived value will mean buying into
deserving early - stage opportunities now , or pay - up down the road . resources
are now scarce , and the competition from investors , funds , mining companies
and foreign countries will only become more intense until somehow supply
increases to the point where demand is met - and this is unlikely to occur
for several years .
goldeditor :
do you buy strictly on technical behaviors or do you combine
technical behavior with fundamentals and why ?
reinhard :
you need both . there have been many scams and market
manipulations where the technicals were orchestrated to be compelling .
likewise , the fundamentals are often manipulated ( remember bre - x ) in an
effort to deceive . at least with bre - x the technicals would have stopped
you out even as the story remained compelling . it ' s never a good idea to
ignore one entirely , although if i had to make a choice , technical analysis
and good money management discipline is all one needs to make consistent
returns .
goldeditor :
what is your biggest trading rule ? ( i . e . never average down ,
first loss is always the best lost etc . )
reinhard :
a rising tide raises all ships , and vice versa , so assess
the tide , not the ships .
some honorable mentions that have served me well : be
patient : don ' t be rattled by fluctuations .
when all you ' re left with is hope , get out .
never catch a falling knife .
cut your losers , and let your winners ride .
bear markets begin in good times . bull markets begin in bad times .
draw trendlines . if a stock is in a downtrend don ' t go long , and visa
versa .
if you learn one candlestick pattern , learn doji at the top of a trend .
contrarians are correct at turning points in the market , but wrong the rest
of the time .
goldeditor :
what books do you recommend for the beginning trader ?
reinhard :
technical analysis of the financial markets : a comprehensive
guide to trading methods and applications by john j . murphy
trading for a living : psychology , trading tactics , money management
by alexander elder financial reckoning day : surviving the soft
depression of the 21 st century by william bonner
reminiscences of a stock operator by edwin lefvre
goldeditor :
richard , thank you for your insights on the price of gold .
i ' m sure your technical expertise has helped many of our subscribers be
better investors . we are going to do an update with you in six months . we
look forward to talking to you then .
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gold editor po box 48451 bentall centre vancouver , bc v 7 x la 2 canada
