Keep an Eye on Your Frothometer

By Russell McDougal

If making profits in the resource sector is your goal, it is not a casual one – especially if you are involved in gold or silver investing. The more you understand the intricacies of these two precious metals the greater your odds of success in the overall resource sector.

As Bill Buckler of the highly regarded the-privateer.com likes to say, gold is “governed”.

If you require convincing of this, you can delve into the brilliant and voluminous works of James Turk, Reg Howe, John Embry, Ferdi Lipps, the cast at G.A.T.A. and many others. You can also find a concise history of U.S. and other government involvement in the gold market over the last seventy years at the-privateer.com/gold2.html

For the purpose of this article, government “participation” in the gold market is a given. You will operate at an extreme disadvantage in the resource markets if you do not have this foundation.

Most interestingly, silver has also long been subject to suppression and manipulation games alongside gold. Apparently, it’s not just “another commodity”.

The precious metals are in competition with the paper money printing presses and they are not allowed to bring any more attention on themselves than can be constrained. Exploration stocks in general are heavily influenced by the actions of these two precious metals.

So, let’s take this background and use it to our advantage for outsized profits. Success lies in the understanding that manipulations against market fundamentals have almost zero chances of long term success!

Intervention in the metals markets is completely predictable. It always takes place when there is evidence of excess froth.

Have you ever heard of a “frothometer”? Well, neither has Webster’s, but they tend to lag the times a bit anyway. A frothometer is simply your inner compass that tells you when things in the portfolio are going a little too well and you might just be subsequently slapped back in line. Here are some tell-tale signs of too much froth.

• You are tempted to show off your portfolio gains to a friend or family member.
• You are beginning to think of how rich you’re going to be with the next double in the portfolio.
• The mining conferences are standing room only.
• You hear gloating by high profile gold or silver gurus.
• It’s harder to get through to your broker.
• The technical charts are at significant points of upside break out.
• Momentum looks unstoppable.
• Resource profits become common topics of conversation.
• The speculators on the NY COMEX market hold huge long positions in gold or silver.
• The commercials on COMEX hold huge short positions.
• The investment advisors index is exceedingly bullish.
• Precious metals stocks are way above their moving averages.
• CNBC is all over the metals.
• Officialdom starts in with their lame anti-gold propaganda.
• Excitement is palpable.

These are the times that are fraught with risk. These are the times tighten your stops, do some strategic selling and little buying. The frothometer is signaling clearly and intervention will soon follow.

A finely tuned frothometer will also tell you when to deploy capital. You will come to love the stealth mode in resources as this is when your best money will be secured.

Panic is a regularly scheduled event with exploration stocks. The weak hands will do what weak hands always do, act with emotion instead of rationality.

Success dictates that you have a degree of staying power. If you are unprepared for them, “corrections” will hit you like a punch in the gut. Eventually, they become part of the routine.

Any stock that is poised to go up 2X, 5X, 10X or more must be allowed some leeway on the downside. An exploration stock that is down 20%, for example, is hardly deserving of a raised eyebrow. Expecting to buy a stock at its ultimate low is not realistic. A strategy of layering in funds is.

What does my frothometer currently dictate?

I don’t believe we’re in stealth mode right now but we’re closer to stealth than we are to exuberance, rational or irrational. The entire resource niche has been under pressure/containment for several months. This is the time to deploy capital.

By the way, we are in tax loss selling season from now until late December. Those with sizeable gains this year will be selling losing positions in order to avoid paying more taxes than they are comfortable with. Extreme anomalies typically present themselves in the first couple of weeks of December. It’s a buying season for the discerning investor.

Invest Resourcefully,

Rusty

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