Gold has long been a focal point in financial discussions, often viewed as a barometer of economic stability. When I first invested in gold, purchasing it at around $300 per ounce, I recall the prevailing sentiment that living in a world where gold reached $1,000 would be undesirable. This apprehension stemmed from the belief that rising gold prices indicated a deeper dysfunction or volatility in the global markets.
Yet, as gold eventually neared the $1,000 threshold, the world didn’t descend into chaos as many had feared. This led to a shift in perception, transforming the dread of $1,000 gold into concerns about a potential $2,000 mark. Each surge in price, culminating in the chart-topping $5,000 predictions made by analysts, prompted a similar unease—even as the global landscape remained relatively stable.
Here we find ourselves, nearing that $5,000 gold mark without any substantial increase in global unrest. However, it’s essential to recognize that much of the sentiment expressed by market participants isn’t grounded in reality. This disconnect also pervades the thoughts held by many investors and analysts alike.
For instance, it’s commonly assumed that gold serves as a safe haven during times of stock market volatility. This belief persists despite gold experiencing a decline of over 30% during the Great Financial Crisis of 2008. Was it truly a “safe haven” during a critical time? Perhaps many investors choose comfort in belief over the discomfort of facts.
Recently, I shared my insights with KITCO regarding the gold bull market that has unfolded since late 2015. I expressed the opinion that it might conclude in the coming year. You can read more in the article linked below:
In response to this article, I noticed a flurry of comments, many of which expressed strong discontent with my views. A recurring theme in these reactions was the sentiment that “this time is different.”
It fascinates me how ardent gold supporters often believe it’s an exception to standard financial cycles. When gold enters a typical down cycle, they frequently attribute it to external manipulation rather than recognizing market forces at play. I’ve previously discussed this phenomenon, which can be explored further in the linked article below:
Among the comments I encountered, many represented a bullish outlook for gold:
“With rising US deficit spending and growing debt, and central banks in Russia and China buying gold to escape the grip of a weaponized Reserve Currency, gold will fall because of an Elliot Wave pattern? Don’t count on it.”
“I’m bullish on gold. Weak dollar, increased quantitative easing (QE), poor employment numbers, and a growing US deficit are all factors driving gold prices.”
“But isn’t it different this time? Given the Biden administration and the EU’s seizure of Russia’s assets, both friends and foes are now hoarding physical metals, countering the suppression efforts of bullion banks.”
“The issue with technical analysis is that it assumes the future will mirror the past. Since 2000, and particularly post-2008, the future will likely differ, dominated by rising debts and inflation, suggesting that gold could surge significantly.”
I intend to unpack these beliefs in this discussion. Firstly, it’s notable that these comments mirror those I received when I predicted the peak for the gold market in 2011. This consistency in human sentiment indicates a timeless pattern: when everyone thinks alike, it’s often a sign of misguided thinking.
Moreover, many commenters shared strikingly similar views. As the adage goes, “If everyone is thinking alike, then no one is thinking.” This herd mentality often leads to non-rational behavior in financial markets.
It’s important to critically evaluate these predominantly bullish perspectives. The prevailing belief suggests that favorable fundamentals will support an uninterrupted rally. However, this mantra has proven misleading in the past; in 2011, bullish sentiments persisted despite a subsequent decline of over 45% in gold and a staggering 70% drop in silver during the following four years.
As the market turned bearish towards the end of that cycle in 2015, expectations shifted, predicting a drop below the $1,000 mark in gold—something that never occurred. We anticipated the opposite and captured a crucial market bottom at $1,050 during a historic lows in late 2015, a moment still celebrated by our trading community.
This illustrates how market psychology often fails to predict significant reversals. Many analyzing fundamentals continue to believe that the market will move in the same direction based on their understanding of current indicators—a mentality we’ve seen before at both the peaks in 2011 and lows in 2015.
To underscore this point, consider a standout observation from Professor Hernan Cortes Douglas, a respected economist who eloquently stated:
“Historical data show that those engaged in ‘fundamental’ analysis for predictions often fail; financial markets rarely crash when the outlook seems bleak. In fact, the opposite holds true—macroeconomic conditions often appear stable just before downturns.”
Another argument frequently put forth by gold advocates concerns central bank purchases, which many believe underpin gold’s ascent. However, it’s crucial to note that central banks were buying gold as prices peaked in 2011 and offloading it as prices fell in 2015. This trend is consistent with historical trends; central banks tend to buy at market highs and sell at lows.
Many narratives surrounding a weakening dollar and the effects of QE are, unfortunately, based on short memories. The dollar has shown resilience, even rallying sharply during QE periods despite expectations of a decline. Moreover, gold prices dropped sharply during these times, contrary to popular beliefs.
False narratives perpetuated through repetition often lead to widespread misconceptions in the market. As Daniel Kahneman noted in “Thinking Fast and Slow,” the power of repetition gives a false sense of truth.
Additionally, as mentioned by Daniel Crosby in “The Behavioral Investor,” storytelling can obscure critical thinking and provide an oversimplified view of complex financial realities. Many investors latch onto these narratives without rigorously questioning their validity, which can lead to flawed investment strategies.
In closing, the popular argument that technical analysis is futile because it assumes the future will replicate the past deserves some scrutiny. While it’s true that some technical analysis may be overly linear, it’s also important to recognize that fundamental analyses often exhibit similar assumptions. Markets are nonlinear environments where both types of analysis can struggle to predict significant changes accurately.
Our analysis approach integrates nonlinear mathematical concepts, creating a methodology better suited for financial markets’ complexities. We may not always be right, but our long-term record eclipses many traditional forms of analysis. I appreciate that some may criticize my perspective, but history shows I’ve correctly called major trends, including a bearish outlook on precious metals in 2011 and a bullish stance in 2015. If listeners had heeded this advice, many would be in a stronger financial position.
As Daniel Crosby aptly stated, “Trusting in common myths is what makes us human. However, learning to discern their fallacies sets successful investors apart.” Ultimately, consider whether you’re objectively analyzing the metals market or merely participating in an oversaturated narrative.
Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for any losses and/or damages arising from the use of this publication.
