They Can’t Both Be Right

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.

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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.

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Categories: Markets

About Author

Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.

Comments

  1. Robert Fazen 29 June, 2013, 20:44

    Adam,

    You’re right about us gold bugs. It did seem like we could have it both ways. But, consider how it might just go both ways. 1) The sagging economy and market gives the Fed further “justification” to increase their purchases of treasurys and mortgage backed securities.

    2) After months of this, bond holders demand higher interest rates.

    3) To keep rates down, the Fed buys still further securities.

    4) Sooner or later everyone realizes that the dollar is worthless. What do you think they’re going to buy then?

    So, eventually (2 or 3 years) we’re going to be right. Not during the deflation period, but after deflation the inflation is going to really hurt!

    Please tell me why I’m wrong here.

    Robert Fazen

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