If you’re looking for an example of a rationality-challenged market… look no further than gold.
To the average spectator, gold seems schizophrenic. For about 10 years – from 2001 to 2011 – gold was a one-way trade: Up. Gold bugs got all the positive-feedback they needed to justify buying more and more of the shiny yellow metal.
Then came 2011… and since then, gold is still a one-way trade: Down.
Between the start of 2010 and August 2011 a single gold futures contract increased in value by $72,000. That’s one contract! You need only about $10,000 in margin to buy one gold contract! But that gain quickly evaporated from September 2011 onward.
Of course, markets reverse all the time. They go up, then down, then up again. But a reversal this sharp is a real eye-opener.
Casual gold buyers have bailed. They clearly don’t have deep enough pockets to sustain positions through the carnage.
Even much of the smart money – hedge funds and institutional traders – have given up on their bullish gold projections.
But there are still the gold bugs. These are what I call “thesis-driven” investors… they place bets based on theoretical cause-and-effect relationships. The mantra has been:
Money printing = gold gains.
And they’ve been proven wrong for over two years now.
Central banks around the world are printing. Yet, gold is tanking.
Somebody’s wrong. It’s either the gold market… or the gold bugs.
After all, they can’t both be right. That’d be COMPLETELY irrational.