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If You Want Proof That Fundamentals Aren’t Everything, Take A Look At Gold

By: Martin Tillier
Posted: 10/9/2013 10:06:00 AM
Referenced Stocks: GLD

It is a cliché to state that we live in a time where information, and even analysis of that information, is cheap and readily available. A simple internet search will reveal everything you want to know about a company, bond, commodity or currency. Financial news is available 24/7 and the possible effects of predicted events are endlessly discussed. We are all analysts now.

This abundance of information is undoubtedly a good thing for investors and traders on balance, but it has a downside. When everybody is judging an investment by the same metrics and using the same analytic tools, it can be hard to remember that sometimes things other than fundamental and technical analysis move markets. Take gold for example.


Logic and fundamental analysis would suggest that gold should be flying right now. The metal is a traditional safe haven in times of trouble, and with the US Government in partial shutdown and an unseemly fight over the debt ceiling looming, these would seem to be troubled times.

Add to that the fact that the Federal Reserve continues to effectively print Dollars and gold would seem to be a one way bet. Yet, although edging higher over the last few days, the recovery in the price of gold could best be characterized as anemic or even non-existent. The same fundamentally bullish conditions for gold have existed for a while now, but the market’s reaction has been underwhelming.

I am not immune to the perils of allowing analysis to over-rule valid feelings. Back in June, I wrote an article for in which I laid out the bull case for gold, and suggested buying the ETF GLD. Part of being a successful trader is being able to admit when you are wrong, take a loss and move on. For pundits, however, the golden rule is to not draw attention to your mistakes. I have never been much for those kinds of rules, so here goes.

That was a terrible call! GLD closed that day at 133.28 and within three weeks was hitting new 52 week lows below 120. Part of the appeal of the trade to me at the time was the proximity of a logical stop-loss on a break below 131, so losses would have been limited, but it was bad nonetheless.

Confession, they say, is good for the soul, but therapy for me is not the point here. When I sat down to research that article, I started from a gut feeling that gold had further to fall. As I looked at the evidence, however, it became “obvious” to me that my feelings should be ignored, and the cold, hard evidence that everybody was talking about would rule the day.

My uneasiness about traders and investors, still long in a falling market getting squeezed was, it seemed, misplaced. I mean the Fed and the Bank of Japan were still printing money and politicians in the world’s largest power looked intent on committing economic Harakiri…gold had to have hit the bottom. It hadn’t.

The fact is that, even if fundamental analysis is sound and logical, market dynamics and positioning are ultimately what drives prices. Most of the time, a trader’s sense of those things comes from a feeling rather than hard data.

In the case of gold, once the collapse came it became evident to me that too many people were worried about it. The yellow metal had, with hindsight, been in a classic bubble situation. Many people had bought in based on the phenomenal boom, but had no idea what to do when the bust came. My sense is that many of those people are still reluctantly holding losing positions, waiting for the pop that logic dictates is coming. This would explain why despite conditions that should be extremely bullish for gold, every attempt at a rally meets resistance.

I am therefore content to leave the gold market, and its derivatives, alone for a while. If you started reading this article in the hope of a flash of genius insight and a strong recommendation, then I am sorry to disappoint you. There are conflicting forces at work here. As long as the fundamental conditions persist, gold’s eventual rise seems inevitable, but it is possible that the sellers will hold it down until those conditions have passed.

For those who are relatively new to the market and who actively manage their own money there is a lesson to be learned here. In this age of information and analysis overload, don’t ignore your feelings as to the state of a particular market. Sound decisions are usually based on fundamental research, but if your intuitive side produces a nagging doubt in the face of an obvious fundamental case, then listen.

Not every piece of research you do has to result in a definitive call. Just as being able to say “I was wrong” is essential for a trader, so is the ability to say “I don’t know where this is going”. If you learn to accept and respect this, you will soon realize that no call is often the right call.