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September 15, 2006

Fear, Opportunity and Google
by Roland Watson

Gold and silver are jittering around their long-term support lines just now and some investors are no doubt jittering around as well. Why is that?

The answer lies in the two "demons" of investing - Fear and Greed. When these two fellows jump on each of your shoulders, pull down an earlobe each and begin to whisper into them, strange things begin to happen. Their most lasting influence lies in bringing out the worst in investor psychology as the masses flock in to buy at the top of a market only to sell out in complete disillusionment at the bottom. We saw it with the NASDAQ as people seized by greed ploughed their life savings into stocks whose claims were as tangible as the images on their websites. Sadly, we do not expect these demons to be exorcised any time soon.

Greed got our hapless investors in late and fear kept them in with a vice like grip as too many presumed the precipitous drop was no more than a correction they should ride out. Meanwhile, as greed for gain propelled the NASDAQ to its 2000 highs, fear of loss propelled gold stocks down to the lowest of the lows. For those who could read the signs and had nerves of steel, it was the bargain of the new decade; it's a pity your advice would have been drowned out by the fervent shouts for eBay, Yahoo and Netscape.

With that in mind, when is the time to invest in a bull market? The answer is anytime before it begins its final steep ascent. Was the recent jump to $730 the final ascent for gold? When silver climbed to $15 was it all the way back down the mountainside after that?

There are people sitting on the sidelines with fiat cash wondering and waiting. They are thinking, "Shall I commit at these seemingly bargain prices or will I just wait a bit longer?" Or is the demon of fear busy doing his rounds whispering the false caveat "Too late, it's over!" If gold jumps from here to $1500, it most certainly is not over. If silver goes onto $30, some people will be left kicking their behinds.

I know what fear means. We have all experienced it at some point in our lives. Fear of financial loss is one of the main ones and it has kept many a portfolio from appreciating to levels that guarantee material happiness. That is why people are quite happy earning their 5% before tax and inflation in their less than pyrotechnic savings accounts. It's not exciting, but at least it is safe.

Let me say something about portfolio fear. The greater proportion of our wealth we commit to an asset with great prospects but volatility, the greater the sense of fear becomes. This is because though the opportunity for gain is there, so is the opportunity for loss. The fear of poverty outweighs the greed of wealth. I think it must be a primordial thing in our psyches.

My advice in that light is to allocate your gold and silver capital according to your comfort levels. If you begin to get uncomfortable with how much you are allocating, just stop and invest below that fear level. I can't tell you how much that would be; you need to sort it out with your inner self. I should know, I have practiced it on myself and can now watch this market's gyrations with never a skipped heartbeat.

But having decided on your capital to commit, buy on the dips. If you believe we are in a precious metals bull market then this drop is nothing more than a dip. If you don't, why are you reading this article? Furthermore, don't try and time the exact bottom, you are not a financial prophet and neither am I. Gold is down 20% and silver is down 30%, can you spell the word "opportunity"? If you can spell that word with a bullish accent then have a look at some suppliers of the king and queen of metals.

While we are on the subject of the NASDAQ and bull market blowouts, I have been tracking some numbers from Google over the past few months for the fun of it. There is a semi-serious side to it, and I thought I would share it with you. It is based on what I call the "Shoeshine Concept". Some of you may be familiar with the almost apocryphal story of how Joe Kennedy got out of the American stock market just before the 1929 crash purely because a shoeshine boy was giving him some hot stock tips. Kennedy correctly deduced that if even a shoeshine boy was talking up the market then it must be in a manic blow off phase. Now whether that story is true or not, it certainly acts as a modern day investment parable.

Now I thought to myself, how does one gauge investor mania in a systematic way? Actually, there probably is no truly quantitative method, but I used Google to put some kind of experiment into action. What I did was to search the Internet using Google for hits on phrases that would lead to sites talking about the NASDAQ, Gold or Silver markets. To be more specific I focused the search on the equity side of those markets. I did this for the reason that simply punching in gold or silver would take me to sites that had nothing to do with investment.

Having laid down the parameters for a representative and consistent search across all three markets, I began to record the number of hits that Google displayed for each of them over a number of months. I then graphed them to look for patterns and I reproduce the latest graph below.

Now there are many things I could say about this graph and its data but I will leave that for subscribers to my newsletter. For example, how does it track the price of gold and silver? How can it be normalized? The only thing I want to say in the context of this article is for you to note the relative number of hits. Silver gets only about a third of the hits that gold gets and gold only gets about a quarter of the hits that the NASDAQ gets. Are these numbers a sign of a precious metals bull market that has blown off for good? I don't think so.

The NASDAQ is getting about 2 million hits and that is in a post-blow off state. How many hits was it getting back at its peak in 2000? I have no way of knowing, especially since Internet access has increased over that 6 years, but by today's reckoning at least double I would guess. The main point though is that this graph is suggesting that there will be no kind of mania in gold or silver until we see combined hits that are well above a million. At some point Google will go off the scale for gold and silver equity hits and then the end shall come

Some people will be looking for a subjective sign that the gold market is near an end. It may be Time magazine trumpeting gold on its front cover. It may be their granny speaking of her latest gold bullion purchase. Who knows? These types of event may never happen and one thing is for sure, the majority of gold investors will ride the blow off all the way up and all the way down. I may also hasten to add that many of these gold investors as yet do not exist; they will multiply in direct proportion to the price of gold and silver. Make sure you are not one of them. It is easy to get on the bull; but it's harder to get off.

I intend to keep updating this graph as well as looking for that telltale "Shoeshine" spike that suggests gold and silver are nearing their final blow off phase. It won't be the ultimate tool in the box, but it will add its own particular slant on things as this bull proceeds and the demons of Fear and Greed begin to open the ears of many a nervous investor an uncertain amount of time from now.

Roland Watson writes the investment newsletter The New Era Investor that can be purchased for an annual subscription of $99. To view a sample copy of the newsletter, please go to http://www.newerainvestor.com/ and click on the "View Sample Issue Here" link to the right.

Comments are invited by emailing the author at newerainvestor@yahoo.co.uk.

Roland Watson
http://silveranalyst.blogspot.com

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