Rather than wait until the entire State of the Markets Letter is ready we decided to rush to web with some preliminary thoughts.

A first draft of the first installment of the State of the Markets Letter

Our State of the markets Letter intends to briefly summarize the state of the markets--not a difficult job, because, to summarize, they are in a miserable state from the investor's point of view; and, to search out some investment opportunities. There will, of course, be opportunities when the markets make a bottom, but as we have said before we love to miss a bottom. Doing so means we miss all the false bottoms which occur on the way to the real bottom.

In the meantime where does the prudent and intelligent investor engage his money. Not that it is necessary to engage. For some three years the disengaged investor--i.e. CASH, has beaten everyone but the stock pickers. Now, what's wrong with that? Well, what's wrong is that it gets boring to human beings. Doesn't bother analysts, but sure is tedious for their readers. Where's the action?

We should repeat the prudent warning: Sometimes people who get off the boring to get some action later wish that they had stuck with boring. So our State of the Markets Letter is addressed to those who want some action on the long side. Remember the real action for the last few years has been on the short side. In fact still is. But there are some interesting things going on at the investment front and we will discuss one of them here.

GOLD! GOLD IN CALIFORNIA! EUREKA!

Perhaps, at last the long winter of its discontent is ending, or has ended. Above, the long term chart of gold. We have never been gold bugs, though we have traded it actively in the past. In fact we sort of agree with Marx that it makes good faucets and bathroom fixtures. But even more important we make a practice of not standing on the tracks in front of moving trains. This is known in the business as not fighting the tape. The time to throw in the towel and not fight the tape has perhaps come.

The chart tells the tale. Look at that rounding bottom. 7 years long already and not finished. Here is what Robert D. Edwards said of rounding bottoms in Technical Analysis of Stock Trends: "These patterns, when they occur after an extensive decline are of outstanding importance, for they nearly always denote a change in Primary Trend and an extensive advance yet to come. That advance, however, seldom carries in a "skyrocket" effect which completes the entire Major Move in a few weeks. On the contrary, the uptrend which follows the completion of the pattern itself is apt to be slow and subject to frequent interruptions, tiring out the impatient trader, but yielding eventually a substantial profit."

Considering all the factors, the possibilities for gold are spectacular and frightening. Spectacular because it could soar (labor?) into the heavens once more. And frightening because of what it has to say about our economy and the prospects for economic turbulence.

The reader will note that no word of fundamental analysis has escaped our computer keys here. We could talk about producer hedging, central bank sales, etc etc. Those are some of the risks attendant on going long gold. As everyone knows we believe that all fundamentals are reflected in the price and the chart, and the chart is telling us that gold has a foundation here which could send it into a bull market.

Note well, or Nota bene, as we are wont to say: Considerable resistance is evident on the chart from the present price to 400. And it goes without saying that no trade or investment should be made without a money management or technically identified stop. Further, asset allocation and portfolio balancing are the responsibility of the reader. Plungers often wind up drowned. As the drug lords say, I'll make you rich or dead.

How to trade this market

This will be a classical bull market, It should be traded with classical trend following tactics. Straight trend lines and support and resistance, or long term moving averages.

Bureaucratic Details

A later installment will examine some ways to invest in gold with lowered risk, such as mutual funds and gold stocks and provide a long term perspective on the gold market.