Thursday, May 17, 2012

A Rainbow for Gold?

By Scott Silva
5-15-12


Woe is me! The market is falling! When will it all end? Many who own gold and silver are losing sleep over the current downturn in precious metal prices. Some are ready to sell their long term holdings, for fear the market has yet to bottom and prices will continue to fall. The abyss seems bottomless. All hope is lost.

Well, things may not be so dire. The end of the world may not be so close at hand. There are forces building that will serve to propel gold and silver prices to new highs. Gold and silver are at attractive prices for bargain hunters who may be more cool-headed than the throngs of amateurs that rush to sell at the intermediate low.

It is human nature to want to conserve what a person has earned. For most retail investors, the immediate reaction during market downturns is to sell. Fear overtakes reason, and selling begets more selling. Prices tend to change much more quickly when the electronic trading algorithms take over, followed quickly by the cowardly crowds. These are the same retail investors, by the way, who tend to pile in at market tops, afraid to miss out on the big score. But most retail investors get it exactly wrong. They sell low and buy high, the certain way to go broke.

Why do so many people give their money away to the markets? It has as much to do with training, specifically the lack of training and discipline, than psychology.  Fear and greed may be the great motivating emotions that drive the market, but control of fear (and greed) through training and discipline allows the investor and speculator to profit in the markets while others fail. This is true for any market. The trick is to learn to act apart from the crowd, move contrary to the path of the mob. The mob is motivated by fear and greed. The contrarian investor takes advantage of the untrained mob by selling to them when they jump in at the market top, and buying from them when they are compelled to sell at the market bottom.

The rise in gold to $1900/oz last year, and the fall in gold to $1550/oz this year are good examples of this dynamic. We can see from the gold futures chart how gold climbed in price, and more recently, how gold has come down in price. What’s important is the trading volume associated with these moves. Volume tells us the relative ratio of buyers and sellers who are acting in the market. When prices rise, there are more buyers than sellers.  Trading volume (left scale) climbed to over 400, 000 contacts when the buyers came in to run the gold price last August. Trading volume also spiked above 400,000 contacts during the sell-off of late September of last year. When prices decline, it is because there are more sellers than buyers acting. We can see a similar relationship, but at the 350,000 contract volume level in the moves up and down so far this year.  To make money from these moves, the trader must act against the market. That is, the successful trader sells into rallies, and buys the dips. Most professional traders then can be characterized as contrarian. They act precisely opposite of the herd.  


We are seeing a market bottom in gold and gold stocks now. Many institutional advisors are telling their retail clients to sell gold and gold stocks just now. But we are not seeing a spike in selling volume. We may be running out of selling pressure. When there are no more sellers, the momentum will shift to the buyers. But some of us will have already bought, and will be ready to sell into the next rally. If there are more storm clouds on the horizon for gold, then let it rain. After all, there cannot be a rainbow without the rain.  So let the sellers sell and sell. I’ll buy and buy.

Responsible citizens and prudent investors protect themselves and their wealth against the ambitions of over-reaching government authority and debasement of the currency by owning gold. Gold is honest money. Investors from around the world benefit from timely market analysis on gold and silver and portfolio recommendations contained in The Gold Speculator investment newsletter, which is based on the principles of free markets, private property, sound money and Austrian School economics.

The question for you to consider is how are you going to protect yourself from the vagaries of the fiat money and economic uncertainty?  We publish The Gold Speculator to help people make better decisions about their money. Our Model Conservative Portfolio has outperformed the DJIA and the S&P 500 by more than 3:1 over the last several years. Follow @TheGoldSpec   Subscribe at our web site www.thegoldspeculatorllc.com  with credit card or PayPal ($300/yr) or by sending your check for $290 ($10 cash discount) The Gold Speculator, 614 Nashua St. #142 Milford, NH 03055

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