Recently I came across a debate that questioned what was wrong
with gold since it only returned 7% in 2012, well below its decade
The counter argument for gold's bullishness boiled down to
comparing 2012 with 2004 since that was the last time gold
underperformed its average. The logic used was something like
Gold underperformed in 2004, returning only 5% that year,
well below its 12 year average of 17%.
But, the following years, in 2005, 2006, and 2007 it
returned 18%, 23%, and 31% annually. Therefore, because
gold underperformed in 2012, just like it did in 2004, it is
poised to outperform in 2013, 2014, and 2015.
Reasoning such as this just goes to show you can find a
statistic for anything (even the statisticians, though, would have
a field day with the above flawed logic).
This is just another easy example of the confirmation bias
that investors have.
Most people have opinions and biases already and then they seek
out a reason to reinforce their own pre-disposed beliefs.
It is typically much easier to find a supporting reason you are
"right" than it is to ultimately change your opinion. After
all, changing your opinion would require you to admit that you
The best example of this is the obvious polarity between cable
news channels. On one side is the more liberal channel and on the
other side is the more conservative one. Are there any in
between? Talking points are tailored to reinforce already
existing beliefs, not to try to form new ones.
In the gold (NYSEARCA:GLD) discussion above it is not hard to
draw the conclusion that the wannabe statistician is likely a gold
(NYSEARCA:GDX) owner and thus seeking reinforcement of his already
strong beliefs that gold will rise while searching for meaningless
statistics for support.
This of course is normal human behavior, but unfortunately
having a bias heading into an investment is not a good strategy for
Removing the Bias
One of our goals is to try to see beyond the noise and biased
opinions that all too often are based on ulterior motives.
We remove the bias by using data and charts
which completely ignore the pundits and those with vested
The sentiment story of gold (NYSEARCA: IAU) and silver
(NYSEARCA:SLV) has certainly changed over the past few
Over the summer, precious metals were in negative territory for
the year and sentiment was in the gutter.
On 6/27/12 when gold was at $1550 an ounce, CNBC ran an
article capturing the sentiment of the moment, "Is Gold on the Edge
of a Violent Downturn?" At the time, it was among the many
negative precious metals articles.
The mainstream media wasn't the only ones bearish as
professional investors' opinions of precious metals also hit yearly
lows as gold bears in a rare occurrence outnumbered bulls.
How Sentiment Helps Us Keep Focused on the Facts
When everyone is searching for a reason to be bearish and
reinforce their biases, usually that marks a turning point in the
trend (for more on sentiment and contrarianism see this
That sentiment extreme alongside the technical chart setup
(shown below) helped us get bullish when most others were bearish
as we suggested longs in both Gold and Silver on 8/5/12 accompanied
by the following chart and commentary.
After finding support at an all-important level throughout the
summer, gold and silver (NYSEARCA:AGQ) both broke out of a
downtrend in August setting up the opportunity and stop location
which we identified, "Good risk / reward setups such as these are
what we look for". By early September, Gold and Silver were
on a tear.
Silver rose over 25% to $33 and Gold by means of the Gold Miners
Bull 3x (NYSEARCA:NUGT) was up over 60% by late September as
sentiment did a 180. Sentiment on the precious metals by late
September had now reached into the 80
percentile bulls, an area that often coincides with precious metal
"Silver: Technicals Suggest Very Bullish Long-Term Outlook",
proclaimed a popular financial website on 9/19, which, combined
with the technicals, was right on time to warn us sentiment had
again reached an extreme, this time a bullish one, and we should
look to take profits.
Our long trade was complete as we noted 9/23, "Silver (at
$33.48) and Gold (at $1750) are at sentiment extremes. A
sell/short signal on Silver (NYSEARCA:ZSL) is a breakdown of the
trend channel (chart and commentary found
) with a stop above this week's high of $34."
The following week prices began to fall, our short signal was
triggered, and sentiment again reversed, eventually hit a low in
late October where we took short profits. We continue to sit
on the sidelines waiting for sentiment to confirm another precious
metals (NYSEARCA:DUST) setup.
Today, sentiment on the precious metals (NYSEARCA:DBP) remains
largely mixed, but is leaning more toward bearishness as a recent
headline from Futures.com supports, "Gold's bull market called into
question by bank analysts".
This is a potentially bullish setup as a result of the pessimism
(albeit not to the extreme bearishness that accompanied last
summer's price lows).
The chart above is also leaning more bullish than bearish as
price has leaked the last few months back near summer 2012's
support levels. We warned on 1/13, "A trendline breakout
would be bullish and can be used as a stop location."
Price hasn't given a bullish signal yet, but the potentially
negative sentiment would support such a breakout bullish
move. We continue to watch a key price level, that when
combined with sentiment, should give us our next high probability
setup in gold and silver.
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