Unless you've been holidaying on a desert island over the last month you'll have noticed that the world's stockmarkets have taken a real beating with Mining sector leading the way. So what to make of all this volatility and bearishness? This article investigates.

We're Still Keeping Our Analysis Very Simple

Back in the January 2006 Newsletter when we published some forecasts for the US markets (and in turn the UK stockmarket) we decided to keep our analysis both very simple alongside trying to trade what we saw rather than what we thought.

When looking at the UK market we generally prefer to concentrate our analysis on Wall Street because that's the leader and major moves in London are just not going to happen without US confirmation.

In the January article the simple aspect of the analysis was to look at the American Broker/Dealer Index (ticker code XBD) which had in our view been a leading indicator throughout the whole bull market starting around 2003. The gist of the article on why the XBD was so important was that -

• The financial stocks have been the real foundations behind Wall Street's rise since 2003
• The brokers are masters at making money when conditions are right
• So until this XBD index broke down there was little point in getting bearish on stocks
• Of course, only a naïve market participant would think that along the way there wouldn't be retracements against the major trend, as we've seen this last month
• As you can see from the XBD chart below, the recent retracement when looked at within the context of the longer term trend is hardly that significant

AMEX Broker Dealer Index (XBD) - Weekly Chart

Forget The Media - They Always Forecast The Long Term Trend Depending On What Happened That Day

One of the worst things you can do when trying to figure out the direction of any market or stock is listen to the media. 90% of the articles, stories and TV shows will always be bullish if stocks are going higher and bearish if stocks are going lower. Like most of the world these days everyone seems fixed on the short term and what they fail to recognise is the tenacious nature of longer term trends.

Simply put this means that these long terms trends often go on for a lot longer than most people think possible.

So one month ago it was hard to find a paper or magazine that wasn't forecasting higher prices. Now, their predictions have turned 180 degrees. Follow these people at your financial peril.

Summary

If we start to trade what we see and not what we think then by looking at the XBD it can mean only one thing - the bull market is very much intact. We should therefore be doing one of two things -

1. Not panicking with our present stocks holdings, realising this is nothing more than a natural retracement (although a relatively vicious one)
2. Preparing to add to our present holdings if need be. Remember, the money trade since 2003 has been to always buy market retracements – it's worked every time so until it stops working surely following the probabilities is the right thing to do

Having said all of this, the viciousness of the recent sell has made the market far more volatile. This volatility will likely be with us over the whole of the summer and maybe even beyond. So do prepare yourself for some further wild swings.

The Gold Market - Where Is It Heading

The prices of both the Gold & silver markets and their related stocks is almost identical to the price performance of the general stockmarkets. Some in fact say that the sell off in the mining stocks was what started the mini rout in the general stockmarket.

The same question is again posed - should we be worried about the recent sell off?

Don't Believe The Propaganda That The Rise Of Gold Is Due To Speculators

Have you noticed that when anything rises in price these days the speculators and 'hedge funds' always get the blame. Speculation can really only work in the short term in that anyone or group of people with enough financial clout can alter the price of any market, but not for long.

So with both the price of Oil and Gold which have been rising for the last 3+ years it's highly unlikely that the speculators are to blame. No, in both cases supply has been outstripping demand. In the case of Gold switched on investors have been allocating some of their assets to the market realising that with global government spending and the printing presses running out of control buying the metal is, has been, and will likely continue to be a prudent strategy.

Weekly Gold Chart - The Retracement Looks Normal Doesn't It

The Money Trade Has Always Been To Buy Retracements

As in the general stockmarket trend since 2003 the money trade in Gold Mining stocks has always been to buy any retracements which is exactly what we've been doing over the last few weeks.

The two Gold stocks we've been buying are Tan Range (TNX.TO) & Royal Gold (RGLD) (discussed in the March 2006 newsletter). But remember we're long term investors so are generally unconcerned by any weakness. All long term investors should understand that fluctuations in prices will happen both ways, but with the major trend very much up stock prices should continue to do well over the next several years.

We're still very comfortable with our $1,000+ prediction for Gold within 2 years and wouldn't be surprised if the price goes much higher.

Summary

• Hold onto your hats because the Gold market has just entered a new phase, one of which moves of $50+ up or down over a few days will hardly raise an eyebrow
• For long term investors the best way to handle these massive price swings is to not follow prices on a daily basis
• Yes, it's hard to do but the big money has always been made by sitting (dumb) on what you've got rather than trying to trade or get involved in the games that the traders like to play in the short term