“In 1581, Galileo, while attending services at the Cathedral of Pisa,
observed a chandelier swinging back and forth. Energized by shifting
air currents, the chandelier moved in a variety of arcs and amplitudes.
Thus was born the concept of the pendulum which Galileo used as a time
measurement device in his later experiments”
The pendulum formula is a belief that, in any investment area, the herd
instincts of greed and fear are prevalent, that virtually all extremes
return to a natural equilibrium point or gravity center, and trends and
cycles of these tendencies can be identified and measured.
Uncovering the full spectrum of trends, cycles, equilibrium points and
fundamental values of the market is vital. The results should be in
harmony with natural growth, maturity and regression.
An investor’s primary mission is to determine extremes of values,
either long or short, that will result in a return to the current
"gravity center" or an equilibrium point and thus a profitable trade.
To this end, all decision lines, formulas and concepts must be fully
integrated and calibrated to result in accuracy, precision and profit.
Fundamental Formula:
Many invest in gold and silver and resource stocks due to our huge
trade deficits, unsustainable consumer debt, housing and stock market
bubbles, etc. In 2003, John Embrey outlined 15 fundamental reasons to
own gold at http://goldmoney.com/en/commentary/2003-09-26.html. Those
reasons are still valid today and provide a type of insurance policy
against potential financial disasters.
Evaluating gold, silver and resource stocks is not easy. Some are
producers. Others may have a defined resource while others are
explorers or prospect generators. In general, there are 10 areas in the
gold and silver area in particular, that must be considered, evaluated
and positively answered.
1. Management, their vision, experience and partners
2. Location of property
3. Infrastructure
4. Number of holes drilled
5. Number of potentially mineable ounces from measured, indicated
and inferred resources.
6. Open pit vs. underground
7. Metallurgy issues
8. Political considerations
9. Finances, net present value & potential share dilution
10. Feasibility study planned or in progress
A more detailed analysis of these guidelines and other issues by
Kenneth Gerbino can be found at
http://www.321gold.com/editorials/gerbino/gerbino060804.html
Technical Formula:
Outside of the fundamental criteria for owning gold and silver stocks,
there are measurable trends, cycles and behavior that allow investors
to participate and profit from the pendulum swings into and out of this
area.
Studies have shown that 60% of a typical stock price change can be
directly attributed to the movement of the overall market. Therefore,
it just makes common sense to be on the right side of a market trend.
To that end, it is wise to first focus on an index trend before
considering individual gold, silver and resource issues.
Also, if we are planning to invest in any market arena, then it goes
without saying that we need to reduce the risk, improve the
probabilities and employ a more disciplined and original approach. My
market direction indicators and advanced market behavior formulas are
designed to assist me for just such a purpose, and I simply call it
Pendulum. It is a personal tool box, as it were, to guide me in
technical decisions.
The concept of trend is basic and using or developing an indicator that
demonstrates a trend is essential. I recommend the MACD (moving average
convergence divergence) found in most popular programs. In my work, I
use my own modified form of the MACD which I called TSL (Trend Signal
Line). Like the MACD it assists in determining trends but without as
many whipsaws. For obvious reasons, it is very important to develop
one’s own indicators so as to avoid getting the same results as
everyone else.
Let’s look at an example. One of the more interesting concepts is to
display a trend and cycle in one integrated view. One can therefore see
the longer primary trend and the short term cycle within that trend.
The red TSL is the trend signal line noted above and the SRA, my own
speed and acceleration cycle indicator. Here is an example from the May
2005 low in the XAU index. Please see….
www.marketpendulum.com/pendulumconcepts.html for a chart description.
As you can see, it did quite well and allowed an early entrance into a
profitable trend. So I would encourage all to develop their own
indicators and formulas.
Today, my Pendulum tool box measures the swings in the market, their
amplitude, force and energy while recording the motion of emotion
across an equilibrium point or gravity center. The concept of gravity
center is a central feature of Pendulum and is found throughout
nature....that force of nature that compels both human behavior and
physical objects to find their equilibrium point.
Results:
Using the concepts and criteria above, I employ two model portfolios,
one gold/silver and the other resource stocks. The gold/silver
portfolio is up an average 265% since 2002 and the resource portfolio
74% since its 2004 inception, a very satisfactory result for my
purposes.
Conclusion:
We have discussed using key fundamental data and original technical
trend criteria as the basis for stock selections in the gold/silver and
resource investment areas. It is not easy, takes time and effort, but
for the serious investor, it can be the golden pendulum formula for
potential success.
