09 June 2010

Gold Bulls Are In Their Cups and the Bull Market in Confidence Games and Voodoo Economics

A friend and correspondent over at BullionVault reminded me the other day that some have been watching what they consider to be a larger cup and handle on the gold daily chart going back to 2008.

My depiction of that longer term chart formation is below.

I had carefully considered that interpretation last year but the handle formed much higher relative to the cup than I would prefer. Further, it did not form like a classic handle on the retracements. Instead I considered it to be a simple inverse Head and Shoulders continuation pattern in this bull market, from the extreme selling in the liquidity crisis.

The patterns have similar pricing objectives, unless you draw the lines as diagonals and attempt to measure off the top of the handle. Either way, each is a chart formation that is active and working with objectives north of where the cash price is today.

There are two reasons to use a cup and handle versus an inverse H&S. The first is that the breakout action on the handle is more easily charted and evaluated. A breakout through the neckline of any H&S is merely a binary event, whereas a handle permits more gradation. Head and Shoulder patterns are simple creatures. The second reason is that some people do not believe that an inverse H&S is an appropriate continuation pattern, and can only be used for a clear 'bottom' of a downtrend. I obviously do not agree with the latter. They can often act as continuation patterns after a severe selloff in a bull market trend that remains intact.

And there is of course, with the advent of modern computerized charting tools, the temptation to overcomplicate a chart and fill the page with far too many lines and circles and diagonal relationships to the point of obscurity, as though a Euclid of Alexandria had thrown up a lifetime of drawing on a basic price chart.

As an aside, sometimes readers will say things like 'So and So is a respected chart authority and he says...' And this is provided without justification, on the basis of authority. Well, one must always listen respectfully to learned opinions, but then look carefully at the empirical evidence, in a scientific manner, which in my book trumps theory and the 'rules' made by men.

When I was working at Bell Labs a very learned and internationally respected authority (and my boss' boss which was the ultimate power of that bureaucracy) told me that I "obviously did not understand information theory" when I presented the case for developing higher speed modems (> 9600 bps) , Digital Subscriber Line technology, and high speed local area transmission over unshielded twisted pairs, well in advance of their formative discussions on the CCITT and US IEEE committees. In other words, I have made my career in not accepting the conventional wisdom and authority of the day. Sometimes what you think you know prepares you for a world that no longer exists, because it was an illusion.

And that goes double for macroeconomics, which seems now more like marketing than mathematics, more astrology than physics. The US financial system is largely a confidence game, or more appropriately a racket dominated by rival white collar crime gangs.

Far too many economists tell people what they wish to hear, or what their masters are promoting, and attempt to give it the trappings of respectability with professional jargon, self-referential theories and elaborate faux proofs, with the trappings of equations based on falsified assumptions. If you want to measure a contemporary economist, see what they are saying, if anything, about reforming and restructuring the financial system.

A government needs to decide first what sort of nation it wishes to be, and then use economics as one means of sorting out more granular choices among policy decisions. To treat economics as a primary determinant of social policy is to perpetuate the hoax of the efficient markets hypothesis and the inherent goodness of 'free trade.' But it does helps economists to gain funding from the plutocrats, and serves to divert the public from the discussion of meaningful reforms.

Finally, at this point in my third career, I AM a 'chart authority' of sorts in my little circle, and it is my money on the line when I am investing, so I think I have some say, at least in my own kitchen, as long as she-who-must-be-considered is out front. lol.

Here is a picture of the pullback on the cup and handle we have been watching for the past few weeks. So far it is as expected.