Wednesday, August 24, 2011

Letter to Dennis Gartman about the Cortes Chart

Mr. Dennis Gartman is a well-known investment newsletter writer who publishes an excellent daily commentary.  In today’s issue, Mr. Gartman provided a comparison chart that was apparently prepared by Mr. Steve Cortes, a contributor to the cable TV network CNBC.  Unfortunately we do not have permission or the ability to reproduce the comparison chart, but Mr. Gartman went on to comment about that chart: 

“SANTAYANA WAS RIGHT: The American philosopher George Santayana said that those who do not know history are doomed to repeat it. In this light we have this chart, courtesy of fellow “Fast Money” contributor and very good friend, Mr. Steven Cortes, noting the correlation between gold’s action of late and that of 1980. The implications here are ominous for the gold bulls… indeed very.” – Dennis Gartman

We thought our Vulture readership might appreciate a letter we felt motivated enough to pen while vacationing.  It follows below.  

August 24, 2011  

Hello Dennis, I have been vacationing away from my usual “battle station,” but please allow me to comment on the chart you reproduced in today’s TGL by Steve Cortes of CNBC.  

The chart Mr. Cortes sent is kind of like a parlor trick.  As if we can even use 1980 as a model at this point, we cannot, … in 1979 - 1980 the gold price advanced by roughly 240% in the final year, from roughly $250 to roughly $850. 

The equivalent 1-year move for gold in today’s market would be August 2010 to August 2011.  A year ago gold was roughly $1,250.  An equivalent 240% move higher would have taken gold to $3,000, or about 56% higher than $1,917.

In the final two months of that 1980 event, gold surged more than 100% from roughly $400 to roughly $850.  

The equivalent 2-month move for gold in today’s market would be June to August.  Two months ago gold was roughly $1,550.  Obviously, a roughly 100% surge in a blow-off gets one to more or less the same $3,000 place.  

Do you see the parabola that consolidated in around Oct. of 1979 in the first chart below?  That would have been a better comparison to today’s market percentage wise. (Roughly $280 to $440 or about 57%, but it was actually the second of two legs up that started at around $230.)   

Mr. Cortes may be right about a correction now, however, one is overdue.   Note the 17% correction which occurred in Oct-Nov of 1979 below in the first chart.  

20100824Gold1979

That’s roughly equivalent to a $325 dip today, or to around $1,590 or so, which is where I would think there would be overwhelming support in this environment. 

One can see what followed that dip in the second chart.  

20100824Gold1980

The THIRD and final blow-off top shown in the second chart does not compare well to today in my humble opinion.     

20100824Gold2011

The current parabola bears little resemblance to the events of 1980 except as a fractal, but again, comparisons to 1980 are at best fractals and disregard the huge differences in the marketplace today.  

Having said that, we will know if this pullback/correction is similar to 1980 very shortly. In two weeks. Notice that gold blew up when it peaked in 1980? Remember it collapsed $260 or so, or about 30% in two weeks. The equivalent today would be to about $1,342. I would be a buyer of gold at $1,342 in two weeks, Dennis. How about you? 

Best regards, 

Gene Arensberg 

GotGoldReport.com

 Credit George Kleinman for the two charts below via Gold-Eagle.com.   

http://www.gold-eagle.com/editorials_05/kleinman111406.html

See two charts below plus a current view.


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Vulture Speculator

Trading gold, silver and mining shares since 1980 with a focus on taking advantage of volatility extremes, Gene Arensberg analyses the markets through a basket of technical and fundamental indicators and shares his findings from time to time here at Got Gold Report. Mr. Arensberg has been quoted in the Wall Street Journal, Dow Jones MarketWatch, USA Today and dozens of other news organizations.

"I've been a huge fan of Gene and his amazing work for years..."

Brien Lundin, CEO, Jefferson Financial, Host of the annual New Orleans Investment Conference and Publisher of Gold Newsletter


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