The Prosperity Index

Daniel Kahneman, Father of behavioral finance has clearly illustrated in his life long and Nobel Prize winning work that a majority of us humans are loss averse. Even if it means making a wrong choice. If we plug his work on the Elliott fractal then we can assume that all down ending C waves will have very few people digging into stock fishing. There will be more panic, as extreme negativity involving mass psychology would mean “stay away”. Capital conservation is not a strategy for a top, it’s always been an investment strategy for the bottom. This is why Humphrey Neil said, masses generally go wrong on a turn. But as technicians, we understand that timing is the name of the game.
The prosperity index espouses the same principle of wrong choices at an extreme. We highlighted the prosperity index on 13 Nov 06 in our WAVES.METALS report. Also known as the Gold-Silver ratio, the ratio lows come near prosperity highs. As illustrated, we as a society are heading into the most prosper times of the last 25 years. And conventional wisdom and conventional research foresees prosperity as a straight line, which means the bounty and loot shoot continue. But unfortunately, life and everything in nature, like stock market is cyclical. After high prosperity it’s time for the swing to the other extreme. The ratio is near 1 and has always returned back from these levels for a quarter century. Whether the Index will turn again remains to be seen.
On the short term, the anticipated triangle resistances ahead for Gold, Silver, MCX – Gold Near, HUI – Gold Bugs, NEM Newmont Mining Corp, GFI Gold Fields Limited and XAU – Gold and Silver Index are still running at 640, 13.2, 9300, 340, 47.4, 18 and 144 respectively came in visibly and clearly. A break for Gold here will push us to our alternate interpretation of a Gold flat up to 690 and maybe to a new high with a first target to psychological 700. If prices move above 690, we will get two signals. One it’s time for Gold (tangible asset) to move to 1000 and second that the prosperity Index has turned from an extreme and it’s time to conserve capital in the paper assets (non tangible) that you might be holding.