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Contrarian Vs. Technical Trading: Steven Jon Kaplan Vs. Gary Savage

Two gentlemen who I've gained a great deal of respect for in the world of investing are Steven Jon Kaplan and Gary Savage. Kaplan is a contrarian investor I've followed very closely since 2007. He has astounded me with his accuracy in forecasting major trend changes and his ability to profit from them. Savage is a technical trader who I've followed for just a few months, but has quickly earned my respect as a competent market forecaster.

Like many precious metals investors, both Kaplan and Savage were taken off guard this year by the severity of the bear market in gold and mining shares. Both agree that the bull market that follows will be epic in terms of percentage gains for gold mining stocks.

Where they differ right now is that Kaplan believes the low we saw in late June was the bottom and Savage believes that the manipulation in the gold market may not be over and we are likely to see new lows before the bull market truly takes off.

Kaplan's primary thesis is that the markets are inherently designed to punish the maximum number of participants and reward the fewest. Over the past seven years, I've seen this proven true time and again.

Because so many traders have adopted technical analysis as a tool for making investment decisions, Kaplan believes that the market has adapted (similar to how a virus might) and rendered technical analysis obselete. In his defense, I've often seen supposed upside and downside "breakouts" proven to be false--no more than "head fakes" before the market moves the other way.

I am definitely a contrarian and a deep value investor. The reason why I also follow Savage is because being too early causes short term pain, before the long term gains kick in. Kaplan is admittedly too early a lot of the time, but is so methodical and disciplined in opening his positions that it woks for him and is highly profitable in the end.

Gary Savage warned his subscribers to exit their gold mining positions within a day of their most recent peak in August. Those who exited then would have avoided a 20% decline over the past six weeks, but will not necessarily do any better over the long run. Right now, Savage has stated that he will not turn bullish again on the mining sector until gold exceeds $1335 per ounce. By then, gold mining stocks will be higher than they are right now. Secondly, because of frequent trading, any profits achieved are more likely to be taxed at a higher rate, as short term capital gains.

Currently, Savage believes that if $1250 per ounce is breached, that gold will retest its June low, is sure to fail to do that and will slump to around $1,000 per ounce. I guess my criticism of technical trading is that it's too indefinite, filled with too many ifs, thens and maybes.

Kaplan also believes that $1,000 per ounce gold may indeed be experienced, but not until after gold has first set a new all-time high above $2,000 per ounce. And if the market is indeed designed to punish the maximum number of participants and benefit the fewest, this would be a surefire way to succeed.

Kaplan may turn out to be terribly wrong in the short term, but considering how absurdly oversold the mining sector is right now, by this time next year I'm sure that he will have banked sizable gains and enjoyed the favorable taxation associated with long term capital gains.

How absurdly is the mining sector undervalued right now? I think this article by fellow contrarian, Adam Hamilton sums it up nicely. "The bottom line is gold stocks are as deeply out of favor as they've ever been in their entire secular bull [market]. They've never been lower relative to gold, nor suffered popular bearishness so extreme, in nearly 13 years. This has crushed their prices to fundamentally-absurd levels even worse than the [2008] stock panic's. They are trading as if the last decade of the secular gold bull never even happened, which is crazy."

Whether Kaplan or Savage turns out to be right in the short term, one thing is almost certain and that is that gold and mining stocks will be priced much higher in 2014 than they are today. While it's uncomfortable to lose money (on paper) in the short term, with double or even triple-sized gains the most likely outcome, it should prove to be worth it to weather the storm.

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