Since the precious metals bubble began almost 10 years ago, the
prices of gold and silver have been driven more by fear, greed, and
other emotions than by fundamentals or allegedly rational reasons.
Gold pays no dividend and provides no cash flows; it actually costs
money to own (storage fees and insurance premiums), and it is used
in relatively very few industries compared to other asset classes
such as land, housing, equities, bonds, or even timber. You simply
can't value precious metals the same way you do other investments.
If most gold (NYSEARCA:XME) isn't owned for sound fundamental
reasons, it seems that investors must stop trying to value it in
fundamental ways and focus on what really matters when it comes to
the precious metals market.
What Really Matters With Precious Metals
There are countless examples of "experts" getting the gold trade
wrong as our firm has highlighted numerous times throughout the
years; one such example was our article
Is the Worst Really Over for Gold and Silver?
All the gold bugs (NYSEARCA:NUGT) who have been touting gold for
years based on "fundamental" reasons such as the Fed's non-stop
printing press are now getting crushed. They rode the precious
metals bubble, falling victim to one of the oldest axioms on Wall
Street: "Everyone is a genius in a bull market." If the real reason
to own gold is the printing press, then shouldn't the US dollar
also be getting hammered?
These experts confused their "correctness" through 2011 with simple
correlation of a precious metals market rising because of an
entirely different reason: euphoria (which has always driven the
In 1999, when gold was trading at 30-year lows, no one wanted to
touch the precious metal. Contrast that with 2011 when "sell your
gold" commercials were on every television channel. Those
commercials can still be found.
Even central banks around the world were selling gold at its
30-year price low and buying at its all-time high. As an example of
just how clueless central banks (and others) have been when it
comes to gold, Ben Bernanke himself said to the Senate Banking
Committee in July, "Nobody really understands gold prices and I
don't pretend to really understand them either." Yet central banks
continue to buy and sell gold.
In July 1999, when gold was hitting its 30-year price low of $250
per ounce, the Bank of England sold a massive amount of gold,
solidifying the reserve banks in history as horrible market timers.
In 2012, when gold prices (NYSEARCA:GLD) averaged $1650 per ounce,
central bankers around the world bought 535 tons, the most
purchases since 1964. With gold now below $1400 per ounce, the
world's bankers are again helping mark the top in gold as they have
lost over $500 billion and counting since the great gold peak of
Euphoria and Emotion
As I outlined on March 22 when gold was trading over $1550 per
ounce, it was no surprise to us that gold peaked in price in 2011
as euphoria went sky high.
The peak of pop culture's obsession with gold occurred right
around the time that gold prices peaked at $1900 in late 2011. We
don't see it as a coincidence that
was the second highest rated television show in 2011 just as
another popular gold-focused television show,
Gold Rush: Alaska
, was in its inaugural season.
Countless treasure hunting television shows remain popular today.
Will History Rhyme?
The precious metals (NYSEARCA:IAU) have always been driven by
euphoria -- or lack thereof. In 1980, the previous peak in gold
prices sent shares up to $850, then a record. However, within two
years, gold prices were back below $300, falling over 50% from its
peak. Today, an investor that bought gold in the late 1970s would
have lost money after inflation. According to the Fed Bank of
Minneapolis, gold around $1400 today is worth only $464 in 1980
dollars, a far cry from the 1980 peak of $850, proving that even
with the precious metals, there are good times to buy and also very
bad times to buy.
Buying "at any price" is likely a losing strategy, just as it is
with all assets.
If euphoria and emotion are what drive the prices of the precious
metals, then we should use them to help identify when gold and
silver (NYSEARCA:USLV) are good or bad purchases. We shouldn't rely
on fundamentals or other justifications that simply don't correlate
much with price.
Profiting From Gold and a Long-Term Projection
My firm has been fortunate to capture many of the great gold
turning points (NYSEARCA:GDX) over the past year as my article
Is the Great Gold Crash Over?
outlines a few of them. Much of this was because we ignored the
mainstream media and listened to our unbiased charts and sentiment
That analysis helped us capture profitable trades, both long and
short on July 13, September 1, September 15, and September 18.
Last week, we suggested buying the
Direxion Daily Gold Miners Bear 3x
(NYSEARCA:DUST) to take advantage of another opportune technical
setup. That trade was already up over 10% in less than a week. Our
tandem trade of buying
(NYSEARCA:GDX) put options was comparably up 30%.
Gold's long-term, medium-term, and short-term trends are decidedly
down; using these charts, history, and sentiment measures help us
target $1,000 for the price of gold.
The chart below of gold's ETF proxy helps put this target in
perspective as gold is behaving very orderly from a technical
Gold's July rally to backtest its trend (shown by the green arrow)
is a key technical setup that we combined with our short-term
outlooks to help provide our September short recommendations when
GLD was trading back above $135.
In reality, a gold decline (NYSEARCA:GLL) of 50%, targeting $1000,
may actually be conservative as the 1980s price action taught us.
Back then, precious metals (NYSEARCA:DGLD) gave back over 50% of
their gains in just two years! But ultimately, they gave back over
70% by 1985.
Thus far, the gold decline (NYSEARCA:PHYS) has lasted two years,
and prices have been chopped around 40%. Market history, the
charts, and sentiment all suggest this trend should continue until
gold bugs really start to throw in the towel.
At that point, it will likely be a good time to buy the metals
again. However, that time could be years away, when the world's
central banks and gold bugs finally completely throw in the towel.
Editor's note: This story by
originally appeared on
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