As gold climbed to its December 2010 all-time high above $1,430 an ounce, virtually everyone believed it would only go higher. Sentiment readings in metals were extreme for much of 2010; they grew more extreme near the peak.
"Several weeks ago, the net position of large speculators pushed to an all-time record high, as hedge funds also became fully committed to gold's rise."
Market observers commonly offered the following reasons for gold's rally:
Well, here we are, a month-and-a-half later. "Madman Bernanke" is still at it. Europe's debt crisis remains fundamentally unresolved. Inflationists are still waiting for a Zimbabwe-like collapse.
Yet this week, gold has fallen as low as $1,338 an ounce. So the question is:
Why is gold falling when the same fundamental reasons that made everyone buy it last month are no different this month?
Mainstream analysts can reply with a dozen "reasons." Yes, they say, quantitative easing continues, but it's designed to strengthen the economy -- maybe it's "not all bad." Yes, Europe is still in trouble, but "they are working on it." Yes, inflation is coming, but "it's not here yet."
Do you know the word for this? It's rationalization. In 2010, people who felt bullish about gold rationalized their bullishness by focusing on the supposedly bullish factors. When the same factors seem less bullish today, the same people rationalize why they aren't.
Emotional bias is as old as investing itself. Consider what Bob said in his December 2010,
On Sunday, December 5, I was in Dallas speaking to a group of savvy money managers... Several of them were keenly aware of the role of market psychology in markets. Still, the only investment comment I received, unsolicited, was "There is only one market I know is going up: silver." It came from a seasoned, successful investor... I asked what his reasons were, and he mentioned that silver mostly comes as a by product of other mining (true), that there are new uses for silver invented every year (true), and that much industrial silver is used up and not recovered (true).
I mentioned that I already knew these things because I read about them 30 years ago, around the time silver topped at $50/oz. Jerome Smith's book, Silver Profits in the 80's, cited the following "four primary causes" for a renewed silver boom:
"...electronics industry has exploded [and so] has the...use of silver"
"While demands for silver are soaring, market supplies are declining..."
"Silver production has been far less than consumption..."
"The U.S. Treasury…sold silver to fill the gap between production and consumption...in the 1960s and the 1970s. Now it is virtually gone."
Every one of these statements was -- and still is -- correct. If markets followed the rules of mechanics, silver would have risen to the moon for the stated reasons. But silver had already peaked at $50/oz. two years prior to the book's publication. To this day, it has not matched its peak price of 30 years ago. Yet the bullish fundamentals...have remained in place the whole time.
Which brings us to gold's more than 6% decline (so far) off its December all-time high. Psychology plays an enormous role in market trends. Investor mood -- bullish or bearish -- sweeps nearly everyone off their feet. They will grasp at every fundamental reason to justify their bullish or bearish conviction.
And when the mood changes and the scales fall away, the "reasons" are still there -- but the world suddenly looks very different.
Market charts reflect these psychological extremes in the form of wave patterns. This makes markets predictable, within a range of probabilities.
You wouldn't know it by looking at all the "We Buy Gold!" ads on late-night TV and your local pawn shops, but gold and silver have sold off hard since the beginning of the year.
On January 20, gold fell as low as $1,342 an ounce, and silver broke below $28. Those are still lofty prices compared to a year ago -- but for gold, it's also a 6% decline since the start of the year.
Why are precious metals falling? Reasons given by mainstream experts include China taking control of inflation, satisfactory results of recent bond auctions by Portugal, Spain and Italy, and Ben Bernanke's confidence in the strong U.S. GDP numbers this year. All that translates into "growing investor confidence" and falling gold and silver prices, say analysts.
But how quickly do you think these "bearish reasons" would be brushed aside if gold and silver reversed and started to rally? Not long at all. If you're an experienced market observer, you know how easy it is to pick out a dozen "bullish" reasons from the day's news pile to justify a sudden price reversal. "Fundamentally"-based explanations only "work" until they don't.
If you're looking for an independent perspective, you've come to the right place. The slowing upside momentum in gold since 2006, the lagging action in mining stocks, and the 30-year non-confirmation by silver.
Source: Yahoo Finance
Leading up to the latest peaks in metals, Robert warned traders in the December 15 not to trust the metals' "bullish fundamentals." He wrote that in case of silver, for example, the reasons cited by today's bulls -- that "...silver mostly comes as a by product of other mining, that there are new uses for silver invented every year, and that much industrial silver is used up and not recovered" -- are true, but they also were 30 years ago, when silver bulls justified their bullish bias with the very same reasons.
Every one of these statements was and still is correct, if markets followed the rules of mechanics, silver would have risen to the moon for the stated reasons since 1980. But silver had already peaked at $50/oz. in 1980... and it didn’t start rising persistently until 2001, 21 years after the peak. To this day, it has not matched its peak price of 30 years ago. Yet the bullish fundamentals, those 'primary causes,' have remained in place the whole time."
And revisiting the gold and it shows you a graph that "explains why gold in 2010 was so much lonelier in making an all-time high than stocks, commodities and real estate were in 2006, when everything was making an all-time high simultaneously."
We've been closely following the long-term juncture in gold and silver for a while. You will read those reports inside our blog/forum.
Keep Chargin’
