How To Use “The “Golden Pendulum Formula” When Evaluating Stocks
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 arena, the herd instincts of greed and fear are prevalent. 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 investors 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.
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
4.Number of holes drilled
5.Number of potentially mineable ounces from measured, indicated and inferred resources.
6.Open pit vs. underground
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
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 you are planning to invest in any market arena, then it goes without saying that you need to reduce the risk, improve the probabilities and employ a more disciplined and original approach. The market direction indicators and advanced market behavior formulas are designed to assist you for such a purpose. It is simply called it Pendulum. It is a personal tool box, as it were, to guide you in technical decisions.
The concept of trend is basic and using or developing an indicator that demonstrates a trend is essential. What’s recommended is using the MACD (moving average convergence divergence) found in most popular programs. Thre is a modified form of the MACD which you can use, 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 ones own indicators so as to avoid getting the same results as everyone else.
Lets 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, and the speed and acceleration cycle indicator. Here is an example from the May 2008 low in the XAU index.
It actually did quite well, and allowed an early entrance into a profitable trend. So it’s encourage everyone to develop their own indicators and formulas.
Today, the 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.
Using the concepts and criteria above, employ the two model portfolios, one gold/silver and the other resource stocks. The gold/silver portfolio is up an average of 265% since 2002, and the resource portfolio 74% since its 2004 inception, a very satisfactory result.
We have discussed using key fundamental data and original technical trend criteria as the basis for stock selection 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.