Pumping Air Into a Flat Tire

by JDH on December 10, 2011

The Dow was up 186 points on Friday, and now sits comfortably above the psychologically important level of 12,000, so all is good, right? Nope.

All is not good, because since the high for the year of 12,810 on April 29, we have experienced a series of lower highs (as indicated by the horizontal red lines on the above chart):

  • July 7 at 12,719
  • July 21 at 12,724 (which essentially formed the double top that lead to the massive summer drop)
  • October 28 at 12,231
  • December 7 at 12,196

See the problem? The Boyz keep doing their best to pump air into a flat tire, and for a period of time it sort of works, but only sort of. Then the laws of physics take over, and no matter how much air you pump in, you can’t inflate the tire to it’s former shape. More air gushes out, and the next round of tire inflation leaves you somewhat less inflated than before. Lather, rinse, repeat, over and over, with increasingly worse results.

Perhaps this isn’t surprising. The Eurozone is imploding, although every few weeks they manage to agree on a bailout, or whatever. The U.S. is also imploding, but at a slower rate, so it’s not surprising that the Dow is able to lurch forward before falling back.

Of course the same pattern is apparent with gold, with a series of lower highs:

Of course the difference with gold, as the blue uptrend line shows, is that we have also had a series of higher lows, indicating that despite all of the market manipulation, gold remains in a ten year uptrend.

So what’s ahead?

Eventually all the air in the world won’t inflate a flat tire, and down we will go. If I had to guess I would assume we will keep pumping until the end of the year, so that for the year the Dow can show a small gain (it’s up 5% year to date, although the S&P 500 is down over 2% year to date). By keeping the market positive for the year, the powers that be can say “see, all is good”, in the hopes of encouraging the sheeple to invest in stocks.

It won’t work, and the inevitable direction is much farther down, but that could be weeks, or months, from now.

In a general crash, everything will crash with it, including precious metals stocks. I suspect they will also be the first to rebound. So, the plan:

First, since it’s now tax loss season which puts pressure on losing stocks, you may want to sell your losers to free up cash (and save on taxes).

Second, because the losers will fall more than the winners during tax loss season, this would be a good time to place below market stink bids to pick up the companies you want. You will want to concentrate on companies with cash, since if we have another credit crisis arranging financing next year for projects will be difficult.

Third, keep your cash handy, because if we do get the crash, and then the inevitable flight to safety (ie. gold), the gold and silver stocks could go on the ride of a lifetime, and we will want to be well positioned.

For now, keep your bicycle pump handy.

Thanks for reading; see you next week.

{ 3 comments… read them below or add one }

PaidInGold December 10, 2011 at 8:34 am


Thanks for another weekly post.

Instead of talking about air being pass through rubber, I wanted to ask your opinion on the availability of physical precious metals.

Do you foresee a tightening of supply? Does the MF Global fiasco, with the latest HSBC lawsuit for gold & silver, change the playing field for you at all?


JDH December 10, 2011 at 8:52 am

As long as the Big Boyz keep depressing the price of gold and silver by manipulating the paper market, I assume there won’t be any severe supply constraints with the physical stuff. However, at some point, something’s gotta give. With many foreign governments and individuals gradually replacing their paper dollars with physical metal, it’s inevitable that the price will go higher.

It may also be inevitable that if the price goes much higher holders of paper gold will want to convert it to the real thing, only to discover that there isn’t any. That’s when the price will go ballistic.

Unfortunately there is no way to predict when that will happen. It could be tomorrow; it could be a year from now. But it will happen, so the prudent course of action is to buy on the dips, avoid margin, and sleep well at night.

PaidInGold December 10, 2011 at 9:50 am

Awesome, JDH. Thanks for sharing.

I think this was the most important statement made in your response: “[T]he prudent course of action is to buy on the dips, avoid margin, and sleep well at night.”

I’ll also be liquidating my positions next week on a green day. It’s something that I’ve been holding off since the Oct. crash, and each week I’ve lost money. Better now than never!

Have a great weekend, J. Will be back next Sat!