Bob Moriarty: Well, not just the action of Gold but the action of the markets. I started in that scene in March of 1970; I’ve been watching the markets for 41 years. I’ve never seen anything like last month. Now, let me take you through what happened last week. One of the things that you can expect is a stock market correction upwards from here.  The 420 point climb on Tuesday, 500 point decline onWednesday and the 400 point climb on Thursday sure makes gold rising a fraction in the days look thin.

Michael: What are the things you think are driving this huge volatility in the market?

Bob: Well, there’s two issues. the schizoid nature of the market that doesn’t know whether it wants to go up or go down has a simple explanation for part of it, certainly in shares. High frequency trading which is programmed trading by the big funds and the big banks that should be illegal. It’s stealing, okay? You want to go buy a stock and stocks got 500 shares at 87, and it has got 500 shares at 88, 500 shares at 89 and 10,000 shares at 90 and you want to buy 15, 000 shares. So you put in an order in for 15,000 shares at 90, you would expect to pick up the shares at 87, 88 89 but the Bank of America or JP Morgan jumps in front of you with high frequency tradings. They snap the shares up a quarter of a second ahead of you and sell them back to you at 90. It should be illegal, it’s stealing and what it does is it magnifies the markets and that’s very, very dangerous.

Michael: I looked at the market at 11:45 last monday and it was down 200 to 300 points and in that last hour of trading it just absolutely fell out of bed. That’s happened consistently; that last hour of trading seems to bring a lot of action in the market. Is that what you attribute to as some computer selling program?

Bob: Actually not, the computer selling magnifies everything but if you are going to sell in a mutual fundthey put their order in at 3 o’clock. So 3 o’clock to 4 o’clock is the most active period of the day when people are trying to move mutual funds. it also tends to show what the market going to do the next day.But the program trading, high frequency trading which is stealing, magnifies everything in the market. Now, we had two days last week with gold moving $60 from a high to a low in one week, that’s unbelievable.

Michael: Think about the non professional investor, the person who’s got other things to do than stare at the market. My goodness it’s a tough environment.

Bob: How do you cope with 600 points down on one day and 500 points up the next day? How do you cope with gold moving up $60 one day and moving down $60 the next? It doesn’t make any difference whether you are a bear or bull, you get creamed.

Michael: Let’s come back to the Gold market for a moment here, I have been recommending a core position in gold since 2001, 2002 that was 30% of people’s portfolio and then you could have a trading position beyond that. I know you talk a lot about trading and investing, and I think that the 200 points that gold gold tacked on in such a short period of time.was a great example of why you never want to be out of  a core position in a massive bull market.

Bob: That’s a good point, you are defining it slightly differently than I do, I define gold as having two functions. The first and the most important function is it’s an insurance policy. It’s an insurance policy against Central Banks like Zimbabwe where they print hundred trillion dollar notes. The most valuable currency that you could have in Zimbabwe then and now is gold because it keeps its value. I would encourage people even at $1800 gold to have a gold insurance policy.

Michael: My bet on gold has been simply a really strong feeling about the incompetence of government to be able to handle the financial circumstances that were coming. Do you see anything out there that would discourage that view?

Bob: We got started in July in 2001 because I saw Gold and silver being at the bottom and I said so; goldat $252 was like stealing. It costs $400 dollars an ounce to produce. If you could buy it at 252 you were doing extremely well. Silver gets to $4 in November 2001. $4 an ounce for silver, are you kidding? But when you talk about $1800 gold and $50 silver, you’re no longer investing, you’re now speculating, you’re betting on the future of the dollar. You’re not buying it because it’s cheap, which is when you should buy it. You are buying it when it’s expensive hoping that somebody else is going to buy it from you at a higher price. Now, I am coming to the conclusion deflation may be the risk.

Michael: Generally gold share prices have not kept up to the metal. What do you make of that?

Bob: It’s interesting that you picked up on that. For years I used to use the XAU over gold as a measure and I had a very good record of predicting both tops and bottoms. It was a very predictable range when it got to a certain point, you were at the top and when it dropped to a certain point you were at the bottom and it was as regular as clock work. The XAU over gold measures psychology, when everybody is very bullish they want the shares, when they are very bearish they want the gold. So, regardless of the level of gold that gave you a very good measure of psychology; that broke down in August of 2008. Everybody should go look at the chart of the XAU over gold now and look at what it was prior to August of 2008. In real terms, gold shares are cheaper today than they were in 2001. Now, in 2001 Michael you were not mainstream, I was not mainstream; we were goof balls saying, the economic system is going to fall apart, GM is going to go bankrupt, Ford is going to go bankrupt, the banks are going to go bankrupt and the system is going to come to a screeching halt. Well, everybody understands that now but shares are cheaper today at $1,700 gold than they were $252 in relative terms, that creates opportunity. Now, I encourage people to invest when things are cheap. Gold is not cheap, silver is not cheap, the stock market is not cheap, housing is approaching being cheap but it’s not yet. But gold shares are incredibly cheap. The market will respond so you buy them now and you are set for life for the market to expand. I think you will see gains of 100%, 200, 500% in lots and lots of companies including some of the ones that are totally corrupt run by idiots.

Michael: We were talking to Don Vialoux who does seasonality analysis, he was also saying it’s a verygood time to be looking at gold companies right now in this time period. How would you approach the senior gold companies, the mid tiers and the juniors?

Bob: Well, if you want a savings account you should invest in the majors. As the price of gold goes up, they are getting enormous benefits from it and some of them will pay a dividend. If you want to make money, you want to invest in the mid tiers and the juniors. When I invest in those stocks I look for a ten fold return. You don’t see it very often but you see it often enough.

Michael: I am sort of a conservative in my approach, I like to keep my money. So when I’m investing in a growth story I’ve preferred things that are already in production because then I do get a direct bangfrom the rise in the gold price since the costs generally don’t go up with the rise. What’s your take on that.

Bob: Here is the beauty, investing in majors is the savings account, investing in mid tiers companies is the convertible that is paying a percentage return and investing in juniors is crack cocaine. Now, because I visit 30 or 40 juniors a year I get to see these companies six months before anybody else does. Investing in juniors it’s very difficult, it’s very dangerous. Strangely enough I would tell people to ignore the facts because that defies everything, It’s really simple, everything that goes up goes up because of psychology and everything that goes down goes down because of psychology. The old adage of sell in May and go away works because everybody goes on vacation for the summer so everything dies in May and it revives in September. If you want to make money in the junior market buy when nobody wants to buy and sell when everybody wants to buy. If a stock’s sitting there and it’s trading 2000 shares a day, put it in a stink bid five cents under whatever it is and wait for it to come to you; because the fact that nobody wants to buy means that these things go down a lot more than they should and you can pick them up cheap. Now, when everybody wants to get into the market its a very liquid market and that’s when you should sell.

Michael: When you are investing in gold shares the direction of the broad market plays an important part. Where do you see the broad market indexes going?

Bob: It’s my belief that we face a very real risk of deflation now. I think the broad markets will be down between now and October, I think it easily could be worse in 2008 and they will have tendency to drag down the gold shares. That said, from a timing point of view gold shares are probably as cheap as they will ever be in anybody’s life time. They are exceptionally cheap and I think they are going up and they are going to up a lot more. So you can sit on them and they go down, so what?

Michael: Let’s come back to the inflation, deflation tug of war going on. People have an intuitive sense that when inflation comes gold goes up, what about in a deflationary environment?

Bob: The value of gold buying power goes up. Now we have $600 trillion in derivatives, I am not even going to try to explain it, I am just going to say ten times the size of the world economy and they are atour backs. Now, in real simple terms, the problem of the United States , the problem of Greece, the problem of Italy, the problem of Spain, the problem of the UK, the problem of Ireland the problem of Iceland is too much debt. We have hundreds of trillion of dollars in debt that will never be paid off and no government has the guts to come up and say you know we’re going to match what we spend to what we take in. Well, I am sorry, folks it’s that simple, your income has to match your out go. If it doesn’t you’re broke and since governments don’t want to do that they keep printing money and they keep wanting to put debt on the backs of the tax payers. We can’t afford it, okay? Those debts are going to be written off and when they do that’s going to be very inflationary. So, we could see $500 gold that would buy ten times as much as it would now. There a two ways a financial system can die, inflation or deflation,  the end result is exactly the same but there is a very real risk of deflation.

Michael: We’ve been in an inflationary world for so many years, over generations. It’s difficult for people to grasp the deflation concept when we all have a fair amount of faith in the government to debase their currency so much that you get Zimbabwe 100 Trillion Dollar Bills that are worth nothing.

Bob: .Yes but there is a as flaw to that thinking too Michael. I spent two years in Vietnam. I was a fighter pilot and I was an intelligence officer, how much faith do you think that I have in the power of government?

Michael: I hope not much.

Bob: No, that’s the most powerful military in the world, we had unlimited money to spend and we lost. I know how impotent governments are, and what’s going on in Europe now is a perfect example. We see the debt debate in the United States. You’re going to tell me those guys are in control? You’re going to tell me they know what’s going on? They are hopeless, they are idiots. It is spinning totally out of control and there is nothing anybody can do about it. They are trying to save the banks in Greece. What do you think the depositors are doing? They are walking in saying give me my money, when everybody in it says give me my money the banks goes under.\

It is really simple, it’s not a Democrat issue, it isn’t a Republican issue, it’s a simple fact of life. You cannot spend money you don’t have and governments have been doing this since 1694 when the Bank of England started and I’m sorry but that model no longer works and we need a new model. We are drowning in debt, everybody knows we are drowning in debt and everybody is saying well, we’ll put on a little more debt and give them a bottle of Jack Daniels to drink.

Michael: I couldn’t agree more. What are you telling investors, people to do these days?

Bob: It’s the most dangerous time financially in world history, do not take risk, do not have debt, do not have leverage positions, have an insurance policy in the form of gold or silver and do what makes sense rather than listening to everyone around you. Don’t trust anything the government says.

Michael: Bob its so nice to have the chance to talk with you and we certainly appreciate you talking longer than we asked for,  but it’s been so insightful. Thank you.

Bob: Thank you Michael it’s been a great pleasure.

Michael Campbell: Don Vialoux has been involved in the investment industry for 38 years. He’s been President of the Canadian Society of Technical Analysts and a former technical analyst at RBC investments its perfect time to get Don view as he specializes in market trends and market cycles.

Don, the devastating drops in markets, from your studies of seasonality, is this a period of time that’s normally weak?

Don Vialoux: What we normally have in summer time, from usually around the beginning of May right until around the third week in October,  is lots of volatility. During volatile markets anything can happen. Markets can go higher they can go lower, obviously they decided to go lower quite significantly.

Michael: When you joined us last you always remind us it’s the old sell in May and go away. 

Don: Actually the best expression is buy when it snows and sell when it goes. There is a series of annual recurring events which are predictable and which are favorable for markets. Unfortunately from May to October there aren’t any of these annual recurring events that have an influence on Markets. Therefore the markets can be very, very volatile. Trying to figure out what direction we are going to go is virtually impossible. A good example during the last 10 years from May to October, the TSE composite’s gone up six times, it’s gone down four times. However when it’s gone down it’s gone down big time. You really can’t predict with any kind of assurance during the summer period, just a very, very volatile markets.

Michael: What shall we make of the kind of technical damage that’s been done, was it a wash out day?

Don: Great question. First of all we’ve had a shock with S&P and downgrade of the American sovereign debt. But what’s happened during the last little while the markets have become so over sold that they are due for a rally of significance.

An analyst named John Rogan came up with a very interesting analysis showing that when the percentage of stocks in the S&P 500 above their 200 day moving average gets below 20% that is a very extreme oversold level. It’s only happened on seven occasions since 1994. On every one of those seven occasions the market has recovered sharply.

On average it’s gone up 5.3% during those seven occasions within two weeks and after three months it’s up 15%. So look for a major recovery rally starting next week.

I have done some of my own work and I have done it slightly differently. I have used both the 200 day and the 50 day moving average and it shows identical data. When you get the low next week that is going to be a very important low because look for a very important recovery coming in at least the next two weeks and probably the next three months. This weakness we’ve seen during the last little while provides a unique opportunity that you only get but once every three or four years.

Mike: That’s good because I started to buy a little on Friday. I always look for opportunities to buy quality stocks when they are on sale. As an example bought some agricultural stocks, I like that area and I want to have more in that area of the market. Canadian Banks too, as I am a believer in their ability to continue to pay their dividends.

Don: One of the things to watch when you have got a major sell out is to watch the volume and boy did we get that bump in volume last week. Its a classic sell off which is typically what happens at the bottom of the market. That’s important, your choice on agriculture a very excellent choice, you are a seasonal investor I can tell.

Seasonality can work very, very well for the agricultural sector. From normally around mid July right through until the end of the year. This year it’s actually working okay. The fertilizer stocks like Potash Corp and Agrium bottomed actually right around the beginning of July. They’ve come down a little bit during the last couple of weeks but already they are starting to show signs of good moves to the upside. Agriculture is a good area, there’s all kinds of choices, whether you do it with fertilizer stocks or you do it with John Deere. The key is the weakness we are seeing in that sector during the last couple of weeks is providing a classic opportunity to buy. We want to wait until the technical indicators are showing signs of bottoming which we probably we’ll get next week. But clearly that’s one of the better choice to be involved in during the next couple of months.

Michael: When a market breaks down the way this one did, we got well below our 200 day moving averages on virtually anything I looked at. But the trend lines have also all been broken to the downside. Is that a problem for the markets?

Don: Yes, it was an amazing week last week, for example we had over 250 stocks in the S&P 500 break support levels, that’s huge. In the case of TSE composite, we actually had 91 TSE composite stock breaking key support levels. But selling pressure so intense is what we are looking for when things are going to start bottoming and start to go higher.

Another sector which looks very interesting on a technical and on a seasonal basis at this time of year is Gold stocks. Historically they bottom right around this time of year,  move very strongly in the month of September, tend to take a bit of a break in October and then move strongly right through until the end of the year.

Obviously gold’s been going higher and with this crisis over the weekend, we are probably going to see gold even going higher in the next couple of months. The gold indexes here in Canada actually bottomed right around the third week in June. They popped quite nicely and are actually if you can believe up  almost 20% before collapsing the last 10 days or so by about 10%, so they’ve actually lost about half of their gains. But this is classic an opportunity to buy a favorite sector that has positive seasonality on weakness. This sector looks very interesting going into the next week.

Michael: One thing just before we go any further is that people have to assess whether we talking about their short term trading money, or their longer term investment money. As you say, we’ve been in a very over sold position and it sounds like you’re looking for the market to find a significant low that could produce a short term trading bump of as much as 15%. That’s sound like a shorter term time frame. You’re not actually commenting on what the longer term may hold are you?

Don: That’s fair, we find that the average investor has a difficult time with markets because they become emotionally involved., You need a very distant approach to make money consistently on markets. Using the short term trading opportunities most people are just don’t have the emotional control to do it. Fortunately there is a way around it, actually we have our seasonal rotation fund, an ETF that trades on the Toronto exchange. We’ve really played these seasonal trades very closely going in and out of markets and actually on Friday our fund actually went up and we’re very close to hitting an all time high. The funds up almost 19% since we launched it about 20 months ago. The reason that we’ve done so well during the last couple of months is that we’ve mainly been in cash, right now we’re 75% in cash and we’re looking forward to opportunities like we’re seeing right now to reenter the market and to take full advantage.

Michael: It sure must be a lot easier to jump into the markets with this level of uncertainty and threats that are out there when you are in 75% cash than if you were already caught heavily committed.

Don: The key is that you have to have to have a disciplined approach towards markets and being in cash during short periods of time it is often is a very wise strategy particularly in the summer when markets are very very volatile. After saying that there are opportunities even in the summer time to take advantage of sector trades and we just mentioned a couple of them, gold and also agriculture. Another one which is not there yet, it is very important to mention this, the trade has not shown up yet but it’s getting lined up,  it’s on our radar screen as a possible interesting trade coming up around the end of August. Now here’s the story, we are just about to go into hurricane season in the United States and this is going to be a very interesting hurricane season this year. The national Ocean and Atmospheric Administration in the States says on average you get 9 – 12 name storms a  year, 5 to 7 storms that reach hurricane strength and one to three that reach major hurricane levels. This year the NOAA is predicting 12 to 18 name storms which six to 10 storms that reach hurricane strength and three to six storms will become major hurricanes. Now how do you take advantage of that? Well, if you look at seasonality of natural gas its, real sweet spot is from the end of August right until the end of October which corresponds very closely to the hurricane season in the United States. We have already had four minor storm so far and things are heating up very much this fall and looks like there’s good reason to believe that there is going to be a major hurricane season coming up during the next couple of months. So what about natural gas now? Well technically it doesn’t look good, technically its still negative but the key is to watch it very closely because as those technicals start to show signs of bottoming over next couple of weeks, that will be a sign that its time to enter the seasonal trade.

Michael: Can I ask you about oil then while we are talking energy?

Don: Yes, oil tends to be less seasonal at this time of the year, it tends to be more of a gassy play and so you want to focus on natural gas during this period as opposed to crude oil and there’s lots of ways to play it, you can play the natural gas, ETFs. I kind of reluctant to mention them because they are extremely volatile and they also have contango problems, the best way to play the sector is to do it through gas stocks and gas ETFs.

Michael: I am interested to hear you talk about exchange traded funds compared to stocks because you just alluded to it earlier. You could buy an exchange traded fund for gold (GLD) but the gold stocks didn’t perform. Does that worry you or does that tell you get into the stocks?

Don: What‘s happened in the case of Canadian gold stocks in particular, they’ve been dampened by what’s happening in the currencies but the key is that the Canadian gold sector actually did bottom around the middle of June, we had a correction no question during the last two weeks but this correction in Canadian gold stocks is a classic opportunity to be a buyer on any kind of weakness. I could say that I would like to see things that we have got a technical bottom in that sector, it will probably happen sometime next week.

Michael: Can you sum up what you are seeing in the overall market? 

Don: Look for markets to have recovery balance starting some time this week, exactly which day I am not sure but the key is we are substantially over sold and we’re due to a bit of a bounce here. The bounce could be as short of a couple of weeks. The other thing to remember during summer time is very volatile to the latter direction but in the case the volatility is going to be in your favor. We have already seen the volatility in the down side now we’re due to the volatility on the upside, at least in the next couple of weeks.

Michael: You have got a huge cash component in your ETF HAC.TO, please reiterate what sectors will you be watching because you like them longer term but they may also have a bounce up?

Don: The sectors which look interesting most of all right now on a seasonal basis are Gold, Agriculture and watching very closely the natural gas play. I’ll mention a couple of ETFs in the natural gas side which might be of interest. The big one is in the state as FCG that’s the symbol for natural gas equity ETF and in Canada we have a very interesting one the symbol being ZJN. So there is a couple of equity ETF’s in the Gassy side which might be of interest, individual institutions will have their own natural gas favorite so  pick your choice and go for it.

Michael: Can you tell about some other sector’s from the seasonality or technical point of view, what about the financials?

Don: Financials normally under perform the market at this time of year, they have a fairly seasonal strength from October to December. That’s the next period to watch but we’re clearly not to that stage yet. We’ll keep you in tune with that seasonal trade but you’re just way to early on the trade at his point.

Michael: What about base metals?

Don: Base metals have a difficult time at this time of year, and historically they have gone down right to until November.  At that point in time that’s when you want to be buyers of base metals in general.

Michael: Don, lets just finish with your advice to investors.

Don: Well the key is that most investors, mostly when they’re making investment decisions the preferred strategy is to have a very disciplined approach, those that have a disciplined approach will do best. If you feel that you don’t have the discipline approach buy my fund.

Michael: I am right with you on that one. Don I want to thank you,  I know it’s everybody’s summer holidays but very important to get you on today.  Thank you.

Don: Thanks Michael it was great.

About Don Vialoux of Timingthemarket.ca

Don Vialoux has 37 years of experience in the Investment Industry. He is a past president of the Canadian Society of Technical Analysts (www.csta.org) and a former technical analyst at RBC Investments. Don earned his Chartered Market Technician (CMT) designation from the Market Technician Association in 1995. His CMT paper entitled “Seasonality in Canadian Equity Markets” was published in the Spring-Summer 1996 edition of the MTA Journal. Don also has extensive experience with Exchange Traded Funds (also know as Index Participation Units) as well as conservative option strategies. In 1990 he wrote a report that was released in the International Federation of Technical Analyst Journal entitled “Profiting from a Combination of Technical and Fundamental Analysis”. The report introduced ” The Eight Phases of the Stock Market Cycle”, an investment concept that continues to identify profitable entry and exit points for North American equity markets.   He is currently a member of the Toronto Society of Fundamental Analyst’s Derivatives Committee.   Now he is the author of a daily letter on equity markets available free on the internet. The reports can be accessed daily right here at www.dvtechtalk.com.

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