Gold is Dead
Stockscores.com Perspectives for the week ending April 16, 2013
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Stockscores Market Minutes Video
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This Week's Trading Lesson
The rapid decline in gold and silver over the past two trading days has left a lot of investors bewildered, wondering why the precious metal could suffer such a loss of value despite all of the common sense reasons for it to be a safe store of value. While central banks continue to print currency, gold has not been the safe haven that many believe it should be.
I want to review some of the lessons that this price drop teaches and then provide you with my outlook for what is likely to happen next.
The first question that many ask is whether the weakness that began Friday was something predictable. Although it does not help those who are invested in gold and gold mining stocks to know that the drop was anticipated, it does help to learn from what this drop teaches.
Gold has been in a bearish pattern for about four months. I have been negative on gold simply because the market has been negative on gold. The chart for gold or the most actively traded ETF, GLD, has shown falling tops since November. There has not been any sign from the market that gold was more likely to go higher then lower.
So, the first lesson is to listen to the market, not to people. The stock market is incredibly honest because people do not want to lose money. The vote that investors cast when they buy or sell something is a pure expression of their opinion. The outcome of the thousands and thousands of trades made by countless investors is price action. You have to trust what the charts are telling you because they are an indication of what people really believe, not what those who speak the loudest are saying.
Falling tops are a sign of pessimism. Stay out of investments that show these on the chart.
I meet a lot of investors with the talks that I do and I know that many have heard me say that gold looks weak and should be avoided but also that many of those people did not sell out. The reason is simple; people will do what they can to avoid the pain of taking a loss. As normal human beings, we do what feels best in the short term. An investor who is in an investment and losing money is going to seek out information that allows them to avoid pain. They are not likely to listen to anyone that tells them to take the loss because that means short term pain. We all tend to be myopic and do not look at the potential for a bigger loss if we hang on instead of taking the small loss.
This leads to the second lesson. Work hard at not being normal. If you want to beat the market over time you have to be willing to take losses when the market proves you wrong. That means suffering some pain in the short term for the bigger picture. Do not judge your success in investing by the last trade you make. Success is measured by how you do over a large number of trades. Small losses can be overcome by your winners but you have to be willing to take those small losses.
What will gold do from here? In chart analysis, a simple rule to keep in mind is that prices that run away from trend lines usually comes back to the trend line. The trend on gold is down but the selling pressure of the past few days has taken price far below the downward trend line. That means that gold is due for a bounce back in the short term. This does not mean it is likely to reverse the downward trend, gold needs to show a lot of optimism before that can be predicted.
Gold will likely make a bounce back in the short term as short sellers cover their position and bargain hunters try to pick a bottom. I do not think it is appropriate for investors to buy here. If you are going to buy gold, you need to have the ability to watch the market very closely and trade off of what is happening on the intraday charts. Since there is lots of volatility, gold can be a profitable trade if you get it right. Doing so, however, requires a good deal of trading skill and for most people, it is best to just stay clear until the emotion in the market settles down.
I expect that gold will make its way back to the downward trend line, either slowly by going sideways or quickly with a sharp bounce back. The problem is that gold, with the volatility that it has shown lately, is hard to predict. The outlook will become more clear with time but I consider any strength that it shows as an opportunity to get out of a position.
Gold has some use in the world but most of the buyers of it have no intention for it beyond putting it in a vault. The majority of gold that is sold does nothing except provide a place for people to store value. There is no rule book that states that we must store value in gold and that it is a safe place to do so. It is only a store of value if people believe it to be so.
When the market for gold was in an upward trend, it served this purpose well. The upticks in the market made people believe in gold, especially with economic turmoil around the world. The upward trend shaped a positive perception and that contributed to the continuance of the upward trend.
The breakdown in gold, which began months ago, has shaken investor confidence in it and rattled the belief that gold is a safe store of value. That takes away the primary reason for why people own gold and will hang over the gold market for a long time, keeping it from returning to favor among investors.
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Here is the chart of the gold ETF, GLD, which shows how falling tops have been building for months. I have no new features this week but I want everyone to learn that you should not fight the mood of the market. Doing so is like trying to paddle a canoe up a river.Back To Top
1. GLD
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References
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Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
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