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Woe is me! The market is
falling! When will it all end? Many who own gold and
silver are losing sleep over the current downturn in precious metal prices.
Some are ready to sell their long term holdings, for fear the market has yet
to bottom and prices will continue to fall. The abyss seems bottomless. All
hope is lost.
Well, things may not be so
dire. The end of the world may not be so close at hand. There are forces
building that will serve to propel gold and silver prices to new highs. Gold
and silver are at attractive prices for bargain hunters who may be more
cool-headed than the throngs of amateurs that rush to sell at the
intermediate low.
It is human nature to want
to conserve what a person has earned. For most retail investors, the
immediate reaction during market downturns is to sell. Fear overtakes reason,
and selling begets more selling. Prices tend to change much more quickly when
the electronic trading algorithms take over, followed quickly by the cowardly
crowds. These are the same retail investors, by the way, who tend to pile in
at market tops, afraid to miss out on the big score. But most retail
investors get it exactly wrong. They sell low and buy high, the certain way
to go broke.
Why do so many people give
their money away to the markets? It has as much to do with training,
specifically the lack of training and discipline, than psychology. Fear and
greed may be the great motivating emotions that drive the market, but control
of fear (and greed) through training and discipline allows the investor and
speculator to profit in the markets while others fail. This is true for any
market. The trick is to learn to act apart from the crowd, move contrary to the
path of the mob. The mob is motivated by fear and greed. The contrarian
investor takes advantage of the untrained mob by selling to them when they
jump in at the market top, and buying from them when they are compelled to
sell at the market bottom.
The rise in gold to $1900/oz last year, and the fall in gold to $1550/oz this year are good examples of this dynamic. We can
see from the gold futures chart how gold climbed in price, and more recently,
how gold has come down in price. What’s important is the trading volume
associated with these moves. Volume tells us the relative ratio of buyers and
sellers who are acting in the market. When prices rise, there are more buyers
than sellers. Trading volume (left scale) climbed to over 400, 000 contacts
when the buyers came in to run the gold price last August. Trading volume
also spiked above 400,000 contacts during the sell-off of late September of
last year. When prices decline, it is because there are more sellers than
buyers acting. We can see a similar relationship, but at the 350,000 contract
volume level in the moves up and down so far this year. To make money from
these moves, the trader must act against the market. That is, the successful
trader sells into rallies, and buys the dips. Most professional traders then
can be characterized as contrarian. They act precisely opposite of the herd.
 
We are seeing a market
bottom in gold and gold stocks now. Many institutional advisors are telling
their retail clients to sell gold and gold stocks just now. But we are not
seeing a spike in selling volume. We may be running out of selling pressure.
When there are no more sellers, the momentum will shift to the buyers. But
some of us will have already bought, and will be ready to sell into the next
rally. If there are more storm clouds on the horizon for gold, then let it
rain.
After all, there cannot be
a rainbow without the rain. So let the sellers sell and sell. I’ll buy
and buy.
Responsible citizens and prudent investors protect
themselves and their wealth against the ambitions of over-reaching government
authority and debasement of the currency by owning gold. Gold is honest
money. Investors from around the world benefit
from timely market analysis on gold and silver and portfolio recommendations
contained in The Gold Speculator investment newsletter, which is based on the
principles of free markets, private property, sound money and Austrian School
economics.
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