THE OBVIOUSNESS OF GOLD

Over the last year the focus of attention has strongly shifted into the direction of Gold. In fact, hundreds of blogs advocate using gold as the ultimate anti-currency and inflation hedge. Countless articles suggest that today even governments are actively diversifying away from the US Dollar and loading up on physical gold. Suddenly, the end of the fiat system of money is knocking on the door and if we want to protect our families, we should buy physical commodities (how emotional, huh!). 

The problem with this hypothesis is the obviousness of it as a trade (or investment for that matter), it is a no-brainer. It is no longer a minority view and it is not asymmetrical. That should be reason enough for us to stop this article here, but let's expand further into this.

One year ago, at the peak of its price, I prepared the following chart for a close circle of friends of mine:

At the time, I was looking at wave-structure,  arguing that this trend was unsustainable and we have entered a blow-off phase. People were getting excited and 2000 was everyone’s sure target (it was never reached). The market became unstable and rapid one-way declines started. That is in my mind where wave behaviour changed, as the market started moving more quickly to the downside. In fact, under this way of reasoning it is quite likely to see a prolonged bear campaign which should bring price to $1000 or lower (does this sound like a minority view to you?).

Many people at this point start citing fundamental factors, yet I believe that it is just as important to know and research them, as it is to relate them to market activity. How come, for instance, that at a time when supposedly huge pockets of money were and are buying, price manages to slide $400 and proceeds to stay in a range for the next year? Something does not add up. Instead, it is commonly accepted that today “one should not look at the market price, but hold it as a hedge against the whole system” and “it will surely continue to go up in the coming years”. So that is how bear markets begin: when today’s price gets disregarded and financial risks are taken up without calculating the downside. I hope that you will be able to say that to your broker when you get margin called next time and you require fiat money to repay your debts.

But there is something very emotional when it comes to money (and gold is money). Subconsciously, we, especially men, identify ourselves with the amount of money that we have. Though that is surely also a biological process, it is just as much a cognitive one. For some weird reason we believe that making money is a reason to fuel our egos and shows that we were and are “right” (which absurdly can even be used as an argument); on the flipside, if we are losing money, we keep our head down and know that we should keep quiet. Such was the case when gold was exploding exponentially and everyone was sure that he was “right”. Today, those people are silently waiting in the dark for the next upmove to prove their intelligence – or keep quiet, if gold crashes.

Jesse Livermore has wisely said that at speculative booms the general public makes fortunes – ON PAPER! But successful speculation and timing requires a lot more discipline, objectivity, humbleness and detachment than any other business.