Special SKI Report #45
Gold Stock Crash: Is There Any Hope?

Jeffrey M. Kern, Ph.D.
Email: jeff@skigoldstocks.com
USERX | historicals
Written Nov 2, 2008
Published Nov 3, 2008

Current USERX price = 8.24, Down another 16% since the last report 3 weeks ago.

Introduction (repeated from prior Reports):

The SKI indices contain short-term (16-20 trading days), intermediate-term (35-39 trading days), and long-term (92-96 trading days) indices. A more comprehensive description of these mathematical indices and their history is found here. Basically, the indices compare today's price to prices from a specified prior time period. The name of the index specifies the time period (e.g., 92-96 index = compare today's price to prices from 96, 95, 94, 93, and 92 trading days earlier). Although I use the oldest gold mutual fund, USERX, for analyses, the predictions are applicable to the broad precious metals' market. I do not recommend or analyze specific stocks, but my subscribers from around the world regularly discuss individual issues on our Forum. In addition to the truly unique SKI indices, I also use "run patterns" to guesstimate turning points in the precious metals' market. A "run" refers to a pattern of daily up and down market closing prices. If the market has 3 consecutive days of higher closing prices, the run is "3 up". If prices then decline for 2 consecutive days, the run becomes "3 up and 2 down". If prices then close higher the next day, the run changes to "2 down and 1 up". Some people have referred to run patterns as "worms". A run pattern is only completed after the direction of closing prices has changed. I have compiled a listing of every run pattern that has ever occurred and generated probabilities that the end of the run marks a high or a low, moderated by the indices themselves.

New Material:

In the last gold stock SKI Report on 9/17/08, titled "Ugly Ski Buy Signal" (http://www.321gold.com/editorials/kern/kern101308.html), I described how the major run pattern buy signal from 9/09/08 at USERX 11.09 had been followed by a large (24%) rise, that prices had then declined to a SKI index buy signal on 10/06/08 at USERX 10.34, but that prices had continued to decline for the first time in 34 years and that SKI was sitting at a significant loss. Such short-term index buy signals have never really lost money in 34 years (averaging a profitable buy/sell pattern slightly more than once per year on average). Therefore, the question was whether "the world was different this time around" and whether SKI would finally lose on such a buy signal.

People regularly state that all systems can be wrong when there is some unique fundamental event. But I do not adhere to that belief when it comes to the SKI indices: The indices are either right or wrong and there is no "excuse" if they are wrong. The indices certainly miss many rises, but I do not consider that to be "wrong". "Wrong" is when an index generates a buy signal and then sells out a loss. The indices can be wrong and sometimes are wrong, but this one had simply always been correct throughout everything that has happened since 1974. And that very special run pattern on 9/09/08 had always signaled that the multi-year (very long-term) trend had turned bullish. So I had a long-term bullish pattern and a short-term index buy signal that had always made money. And yet, I am sitting at a large loss.

I regularly write about my emotions because although we are supposed to be objective emotionless investors (and I am supposed to simply follow mechanical and objective SKI indices and major run patterns), that is not the reality for most people. I regularly describe my emotions because they are excellent contrary indicators and I believe that readers benefit by paying attention to their own emotions (that are usually paralleling mine). On the weekend of 9/20/08 I wrote how I was "overconfident" while sitting at a large profit, that I was taking my disabled wife out for a special celebration dinner, and subscribers even suggested that I raise the subscription fee. And then the bottom gradually fell out of the gold stocks, I lost my profits, and I am sitting at the largest loss of my life.

By last Monday (10/27/08), when USERX had plunged to 7.08, I was absolutely depressed. I wrote that day how, when I awoke that morning in another state of fear, that I had decided that I had to end the pain by calling to put in my sell order for the mutual fund USERX that would then be executed at the closing price for that day, BUT THAT I WAS REFUSING TO GIVE IN TO THOSE EMOTIONS. I did not sell even as the gold stocks appeared to plunge another 10% in the last hour of trading. Am I/we going to lose even more money?

Conclusion:

As usual, I write about SKI's successes and failures (as well as Jeff, the person's successes and failures regarding discipline) in an open manner. Integrity is everything and I invest all of my non-retirement monies based upon the indices and the run patterns. Going into October, I was sitting at over a 20% profit for the year 2008 (based upon catching almost every rise during 2008 and selling close to almost every high, as well as going short in mid-July 2008; see prior Special Reports), but my profits have been eviscerated in the last month and I am sitting at almost a 20% paper loss for this year. I've never lost on a year-over-year basis. Will this be another first?

One is not supposed to invest based upon "hope", but for the first time in my life, I am sitting at a large loss. Is there any hope for a rise in the gold stocks and the precious metals?

We have several hopes. First, the multi-year SKI run pattern cannot turn bearish. Just as that pattern predicted a major long-term decline in May 2006, it is now objectively predicting a major long-term advance. Second, my emotions were appropriate for a major low on 10/27/08 and USERX has risen 10% off of that low. Third, prices on Monday (10/27/08) fell just enough to hit an extremely long-term SKI index that compares the current price to prices from 881-885 trading days earlier (May 2005). That index is so long-term (and therefore generates such rare signals) that has not been adequately cross-validated (even after 34 years), but it's touch offers some hope of a low. Fourth, although time is running out for SKI and it appears to be impossible, a massive rise during this coming week could still sell SKI out at a profit or a small loss on a short-term basis.

And lastly, during the 1980s and 1990s, when folks were sitting at 40-80% losses, I could not provide them with any reasonable hope that they would recoup their losses because those large declines occurred over several years subsequent to gradual declines. The current decline has been "parabolic". The current extreme volatility and rapid decline are supposed to be forming a major multi-year low. I/We did not become excited over a "small" 10% rise during this past week due to this extreme volatility. It is perfectly reasonable for the gold stocks and USERX to rise in a rather dramatic and volatile manner, but "reasonableness" isn't a guarantee.

My Very Best Wishes during this most difficult period,

Jeffski

If you are interested in following and learning more about the SKI indices, I'll write another Report in three weeks or you can shell out the big bucks for a SKI subscription. Weekly Updates are available by subscribing for a month (or longer if you're wise and cheap enough to want to save money) at my website www.skigoldstocks.com for the princely sum of $25 (for a one month subscription) or more ($200 for an annual subscription). I also provide more frequent intra-week messages/alerts at a slightly higher price along with access to our informative Forum. The precious metals are in a very long-term (decade+) up-trend but are the most precarious, volatile, and psychologically difficult market in the world (in my opinion). That's the way it's always been.

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email: jeff@skigoldstocks.com

Jeffrey M. Kern,Ph.D., is an academic psychologist with a specialty in the measurement and prediction of human behavior. The communications provided are for informational purposes only and are not intended to be investment advice or recommendations for specific investment decisions. Dr. Kern is not a registered investment advisor, but is registered as a commodity trading advisor (CTA). The information provided is considered accurate, but cannot be guaranteed. Investments/trading in narrow market segments or gold futures is for individuals willing to accept a higher level of risk for the opportunity of greater returns. Past performance is no guarantee of future performance. His website is www.skigoldstocks.com.

Communications should be sent to: jeff@skigoldstocks.com.

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