perhaps a little hard to understand ..

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    Rodney C. Cook, Ph.D.

    Gold has neither pulled back dramatically nor broken out since my last writing on Dec 31. Well, there have been a few quick sharp declines, but they have been met by solid buying. Clearly, the vast audience for my writings was quick to follow my advice and instantaneously snap up massive quantities of bullion on pullbacks.

    Seriously though, I wish to thank those who have responded with generous encouragement to continue my endeavors. But I have a confession. A nagging feeling that something is amiss. Surely, when a shoe shine boy such as myself fells compelled to start writing a financial newsletter about gold, the top must be in. My guts are churning. I do not appear to be alone.

    Intestinal neurons are manic among those who are close to gold. But the collective is schizophrenic about the direction of the impending move. Extreme outcomes are anxiously anticipated, and are being extensively discussed.

    In the face of such anxiety, it is useful to examine these extremes and their adherents.

    If it Keeps on Rainin' the Levee's Gonna Break

    The Elliot wave camp is expecting pure deflation, where credit implodes, prices collapse, and gold plummets to $200. Or less.

    If gold goes to $200 in a deflationary collapse, it will still likely buy more goods and services than gold did at $350. Prices of less precious stuff will command fewer dollars. True, the fiat that survives the debt implosion would initially perform better than gold. Banks would collapse. Paper dollars would reign. But the definition of money will have changed. The credit component will have vanished, leaving only the tiny cash component. If you have cash on hand, if the price stays down, if there is not an immediate panic into gold, if you have a reliable source of supply, if regulatory measures have not been invoked, then you might be able take delivery of one ounce for every $200 you have left.

    And the end game would still be gold and silver.

    The hyperinflation camp's extreme alternative considers gold replacing fiat entirely. Gold would be $30,000. Or more.

    If gold goes to $30,000 in a hyperinflation of the US dollar, it will likely buy less goods and services than one might expect. Especially those goods and service for which cash is the primary medium of exchange. Would milk be $10, $100, or $1000 a gallon? Will we see DOW 30,000? Maybe DOW 100,000 before the wheels come off. Will housing prices double, treble, or more? What forms of debt would be monetized? What assets will be purchased by the Fed? Will prices be confiscatory? Once again, this is all unknowable, because the definition of money will change along the way. The debt component will swell. The cash component will diminish. Perhaps even relegated to the black market. As Gold. Gresham's Law in extremis. The dollar would then become what the monetary authorities decide and be distributed to whom they decide. After all they will have monetized, and hence own, literally everything. And we will have morphed into something new. Not communism, not socialism, not fascism. But some new form of -ism. More terrible than anything that has gone before.

    And the end game would still be gold and silver. At least for the border guards.

    So, the pure deflationists believe that the long cycle will prevail; the pure inflationists believe that the monetary authorities will overshoot with their re-flation efforts. The collective opinion is, no surprise, intermediate to these extremes. Unlike the alarmist views; however, intermediate scenarios don't sell a lot of newsletters. They only offer prudent investment strategies.

    When the Bullet Hits the Bone

    No doubt that there is an incredible wealth trigger in the gold and gold share markets. The hammer is cocked. Just make sure you are not looking down the barrel at unknowable intermediate scenarios when the powder ignites.

    Keep your sights on the endgame.

    Compensatory Mechanisms

    As the gut churns, most investors appeal to logic to quiet the call to precipitous action. Mr. Market is sinister about exploiting the gut. Trust your gut and loose your head. Any investor's first lesson. The collective gut is no different. The collective mind must override.

    Natural systems are highly resistant to extremes. Wonderfully homeopathic and self-healing. There are compensatory mechanisms that emerge to either pre-empt or correct the extreme outcomes. My own perspective on X-flation was expressed in TINY BUBBLES authored on December 5. I lean toward modestly successful re-flation effort in the short term, with deflation overwhelming the US monetary authorities in the longer run. I drew this opinion from the collective mind. I am positioned accordingly and will shift my position based upon this collective mind.

    Pattern Recognition

    There are neurons in your gut. Seriously. Your heart too. The same neurons that are in your brain, only less dense. And the neural network among the gut, heart and head are interconnected with sophisticated pattern recognition systems to guide our survival. The best CEOs learn to trust their gut. They calibrate their successes against their gut feel. The best investors learn not to trust their gut. That is, they often calibrate their successes contrary to their gut feel. And let the collective mind be their guide.

    Successful commercial pattern recognition systems, including humans, are calibrated against the collective mind.

    Getting An Edge

    The collective mind can be tapped with good old fashioned due diligence. The opinions of pundits, analysts can be evaluated along side objective data to make a decision. Or write an article. This works reasonably well for identifying primary trends and turning points (See ARE WE RICH YET, written on November 3, 2002) and even, to a limited extent, in selecting stocks (See INVESTING IN GOLD SHARES, written on November 19, 2002). Because there are so few senior gold stocks, the human pattern recognition system is quite good. But when the number of stocks to evaluate increases, the sheer volume of information and data can be confounding.

    So. I propose a little project. It would be interesting to use scientific pattern recognition to score penny gold stocks. No? It would be necessary to select the best combination of statistical methodology and measurable features from among the many thousands available.

    I can handle that.

    13 January 2003

    Rodney C. Cook, Ph.D.
    CTO & Founder
    Sightward, Inc.
    425-688-9921 x1029
    [email protected]

    "Power from Prediction"

    Copyright c 2003. Rodney C. Cook, Ph.D. All Rights Reserved.
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