From The Daily Reckoning Australia Jan 9th 2014 Why Gold Will Drop to $1,000 Per Ounce By Greg Guenther When the market fails to confirm your thesis, it's time to step aside. You always hear traders say that they never 'marry' a stock. That's because once you fall into the story, you tend to lose perspective. You seek out only opinions that confirm your thinking, tossing all other analysis out the window. Inevitably, this behaviour leads to ruin. Even if you aren't a trader, there's still merit in adopting this maxim. It doesn't mean you have to drop all of the conviction from your investment strategy. Just know that it's impossible to tame the market. If you try to fight it at key turning points, there's a good chance you'll get burned. In December 2012, there was a new record in gold holdings by popular exchange-traded funds. The spot price hovered around $1,700. The 12-year golden bull appeared alive and well. That's where the trouble started. At this point, gold had become too tradable with the invention of ETFs. They offered investors exposure to the physical metal. With ETFs, momentum traders could easily gain exposure to physical gold and hop right off if they didn't like the ride anymore. One of the market's inconvenient truths is that one wave of selling can inspire countless other investors to run and hide. The same herd mentality that pushes prices skyward can also send them crashing down. That's true of anything you trade on an open market - even gold. With that in mind, early last February, I made the following observation in The Rude Awakening as speculators exited gold: 'Gold's mojo has vanished. 'And if stocks have any say in the matter, it isn't coming back anytime soon. 'I love my charts. But I don't need a picture to show you what's going on here... 'By now, you know the trends. In the 1990s, gold was stagnant while stocks enjoyed an extended bull run. As stocks started to fall out of favor in the early 2000s, gold's massive rally began. 'Right now, another shift is brewing. The tide is turning in favor of equities.' That day, February 4, gold was sitting at $1,667. A week later, we looked at the charts and called $1,550. Within the next two months, it dipped below $1,550...ultimately crashing to $1,330 by April 15. Source: '$1,550,' we wrote that day, 'was enthusiastically bought every time gold dipped since its 2011 top. When this critical support area broke, it was lights out. Sellers are now in control. You must accept the fact that gold has entered a bear market.' Come June 11, with gold at $1,374, I drew the new support level at $1,350. If the price crossed that line, I figured a swift drop to a range of $1,200-1,250 was reasonable. It only took another nine days for the Midas metal to break below $1,350 and sink to its year low - $1,178. At that point, I expected the metal to continue its downtrend, ultimately landing somewhere between $1,100-1,000. I still think that today. Where did I get $1,000 from, you ask? Well, $1,000 seems like a reasonable long-term floor. At that price, gold will have completely retraced its 2010-2011 push toward $2,000. Source: I added the long-term moving average to this chart to give you a smooth look at gold's big, secular trend. Once price fell below this mark for the first time in 11 years, it became apparent that the massive uptrend was in trouble. Now, you might be thinking this is a chance to buck the herd and be a contrarian and think, Gold's dropping...people are selling...I should buy. But it's important to remember that the herd is usually wrong - at market turning points. Following the herd for the meat of a big move like the surge in stocks in the 1980s and 1990s or gold's roaring bull market in the 2000s was the correct move. But knowing when to jump on board (and when to head for the hills) is the tricky part. That's where technical analysis comes in handy. By analysing price charts and projecting trend lines, you have the chance to spot major market turning points before the average investor catches on. If you set aside your emotions and follow the trends, you have a shot at buying into a big move while most investors are still selling - or selling out of a winning position while the herd sits and waits for a comeback that might never arrive. Let's use gold's 20-year chart as a breakdown... Source: Take the late 1990s, for example. Gold was still locked in a downtrend - a series of lower highs and lower lows formed a downward trend channel. Instead of buying right away, you could've followed the trends and waited until the downtrend was broken. That would've been early 2002, when gold broke out toward $300. That marked a perfect opportunity for an aggressive buy. And even if you're a more conservative investor, you could have waited for a rising channel to form before making a buy. That would have postponed your purchase until mid-2003, when gold finally posted a meaningful higher low near $330. After you figured out your entry, there wasn't much more to do. Gold's bull market played out beautifully. The early stages (before most folks thought twice about gold) from 2002-06 gave you a tight rising channel. As gold started gaining popularity as an outperforming investment in 2006, you witnessed increased volatility, a much wider channel and even bigger gains. Until it broke below its trend channel, my analysis gave gold the benefit of the doubt on the upside. It wasn't until the big break that began setting up last winter that it appeared that the decade-long secular bull was finished. This is a perfect example of not trying to call a top - but to take what the market gives you. I wasn't super bearish gold at $1,800. It was still possible that the action we were seeing was noise or consolidation - or just a potential test of support (a necessity of a healthy bull run). It wasn't until just below $1,600 that I shifted my thinking firmly to the bear case. If you still doubt gold's trajectory...take a long-term look at the Dow/gold ratio. That is, the Dow Jones industrial average priced in gold. Source: The ratio touched an absurd peak of 43-to-1 when the tech bubble began to pop in 2000. It was reasonable to think the ratio was headed back to its 1932 level of 2-to-1...or the 1980s level of 1-to-1. In reality, the Dow-gold ratio bottomed a little below 6-to-1 in late 2011. At writing, it's back above 13-to-1. Clearly, the market didn't give a hoot about what anyone thought was reasonable. It's pretty obvious what happened when the Dow finally broke higher after years of decline versus gold. It signalled the massive performance shift we wrote about in February. After more than a decade in the driver's seat, gold is giving up ground to stocks. If you're still squeamish, ask yourself: Is your desire to buy gold based on reasonable analysis of market conditions? Or is it simply an emotional reaction to the sell-off? If you're a long-term-oriented investor, we suggest giving gold a chance to consolidate or move lower. After all, what's the rush? When was the last time you saw any asset class permanently recovered from a violent drop the very next day? It just doesn't work that way... There will be snapback rallies and more downside. Expect to wait a long, long time before a suitable base forms. The gold market experienced a great boom. Naturally, people flocked to it. Investors, traders, hedge funds and your crazy co-worker bought gold. People wanted to own it because of its performance. Now they've already left or are leaving. I don't think they'll be rushing back to buy anytime soon. Treat gold as a safe haven if you're going to buy now. If you jump into a gold position this year expecting explosive gains, you'll find nothing but disappointment... Regards, Greg Guenther for The Daily Reckoning Australia
Did Mr Guenther explain why it would rise to 1900 back in 2008? or 2001? It's all possible. A golden meteor shower could wipe us out tomorrow. LOL
"Take the late 1990s, for example. Gold was still locked in a downtrend - a series of lower highs and lower lows formed a downward trend channel. Instead of buying right away, you could've followed the trends and waited until the downtrend was broken. That would've been early 2002, when gold broke out toward $300." That simple hey :S lol It is so easy looking back!
The problem with looking at charts/graphs of the dow-jones/gold ratio is that everyone on both sides of the fence make the same mistake. Whether you're betting on or against gold (which is done by not betting on it), the charts themselves have no real predictive value (in my opinion). The fact is that (1) the U.S. government is borrowing money into existence as if it could do so indefinitely. (2) The markets for precious metals are most likely being manipulated. With both these variables in effect, you can get short-term (relatively) effects that lead people to believe: (A) U.S. dollars will continue to get me more stuff (B) More U.S. dollars will get me even MORE stuff In this case 'stuff' is commodities and goods. The day that both A and B are no longer a generally accepted belief, everything falls apart because the medium of exchange is no longer stable. Therefore, trend analysis is generally speaking a waste of time, especially if you're planning to hold gold/silver til it meets some criteria for selling. Here is some very basic analysis I have done on the dow/gold ratio: The distribution of dow/gold ratio is non-normal. What this basically means is that a certain range of ratios, which are not randomly distributed, are more likely than others. A ratio of 2 ounces or less per 1 stock of dow jones has a 4.6% or less chance of occurring, given the historical data. Similarly, a ratio of 34.95 (almost 35 ounces per stock) or higher has a less than 5% chance of occurring. The ratio range with the greatest likelihood of occurring is 4.97 to 20.37, with a cumulative probability of 50% for this range. Essentially, 50% of the time, the ratio will fall somewhere between 4.97 and 20.37 Current trends: At the moment, the current ratio is 13.1. Since September 2011, the ratio has increased from 5.8 to its current level. Essentially, gold has "lost" value when compared to paper assets. This data is not predictive and is only descriptive. However, it will give you an idea of when stocks or gold become over-valued or under-valued relative to each other. My predictive view is based only on history. If all fiat currencies have failed and ours is showing signs of failure, I better prepare for a probabilistic certainty, despite what we are told.
Its all about the USG either defaulting or not defaulting..... Even the dooms day clips on youtube have really gone quiet and many are sick of the same repeated clips saying the end of days is upon us. Gold only went to 1900 because of the pressure on the system after GFC 1 but the rulers (The Fed) pulled QE out of their asses and they'll be running that for a few more years yet. Personally I think 1,000 would be a great time to buy and like Jim Rickards says you should hold about 10%-20% of your assets in Gold. And keep an eye out on what China also does with Gold.
Given that "trend analysis is generally speaking a waste of time", you seem to have done a lot of trend analysis?
You're right. Maybe I'm over stepping by saying a complete waste of time. I mean its a waste of time for people who don't make a living off short-term gains and the like. I find it too risky. I'd rather play the long game. Especially in a manipulated market. Trew: wrcmad is playing with words. What is the point of figuring out probability of an event? Answer: Prediction with a certain amount of confidence.
Using the gold silver ratio movements as a basis for investing is bizarre to the extreme. An awful lot of incorrect assumptions....historic levels completely unproven for example....are used. It is the quickest way to get 'skinned'. You might as well use the relationship between gold price and average monthly temperature.....I am sure there is a relationship that can be concocted from this also.... Investing using 'probability' is simply gambling and we all know what happens to gamblers.....they lose.
It is rare that I disagree with you tolly, but this one is a doozie. EVRYONE INVESTS USING PROBABILITY. The probability that RE prices will increase, The probability that Telstra will keep paying a dividend, The probability that fine art will appreciate, The probability that PM's will increase in value? Smart investors ensure the probability of winning negates the probability of losing, using smart risk management, and an exit plan in case they are wrong. The trouble starts when investors assume they are right, and thus have no contingency plan or management strategy.... (Eg. the assumption that PM's WILL unquestionably one day be worth a lot more than they are now)
Perhaps it comes down to the meaning of the word probability. It is true what you said, we invest in what we deem to have the best chance/probability of success. I can't help but think of 'probability' as that which was taught to me in high school. I have seen probability fail someone dismally at the casino....who would have thought such an event could happen .....the poor bugger. I prefer to look at what we do as being a choice of the best course of action according what we understand. If we understand properly then what we expect will occur....eventually. Probability is too simplistic. It is more like anticipating the motion of natural rythms. We are either out of synch or in synch.
Casinos don't lose because they base everything on probability. A player can win big money if he gets lucky (he beats the odds) but it is quite rare. However, most people behave as though they will get lucky. The fact of the matter is, over a long enough period of time the house always wins because they have the odds in their favor. Lets make a simple game: I'll bet you, you can't beat me in a coin toss game. If you can successfully guess what the coin will show 4 times in a row, I'll give you $100. If I win, you have to give me only $10.00 Now lets figure out the probability. If we toss a fair coin, the odds of you getting it right one time is 50% (.5). But what about 4 times in a row??? .5x.5x.5x.5 = .0625 (6% chance) That means I have practically guaranteed I will win $10 from you. We can repeat this game several times until you finally win. Unfortunately for you, by the time you actually win the $100, you have already paid me well over $100.00 For example: If we played this game 100 times and you won 6 times out of the 100 (which is what probability says you will win), That means you would have won $600. But $10 times 94 is $940. Which means I end up winning. Casinos do this with their slot machines and with other things like black jack. Over a long enough period. They always win. Now obviously, some games have much better odds than others. Typically when you're not playing against the house, you have the best odds (e.g., poker). Investing in stocks/precious metals/etc. is not the same as gambling. You don't know what the odds are and even if you did you cannot account for social phenomenon (i.e. blackswans) which control the behavior of investors. Bubbles are a social phenomenon. Despite an overwhelming amount of available information (as in the casino example) people behave as if the rules or odds do not apply to them and this is what leads to giant bubbles. Human error (lots of examples) such as printing a fiat currecy to death is another example of social phenomenon that has a huge affect on "investments" and can cause a probabilistic certainty. In other words, I have explained before that a dow/gold ratio of 2 ounce of gold per one stock is very unlikely (less than 5%) at any given RANDOMLY chosen moment. BUT, and its a huge BUT, with enough information, you can basically predict with a GREAT deal of confidence that such an event will occur soon (as many have done). In sum: 1. Investing is not gambling because you CAN put the odds in your favor. 2. Investing can lead to large gains when you have enough (correct) information. It all boils down to information. I find it funny though, because you can give some people the right information and they will still lose a crap load of money.
It's most likely it will bottom in the 800-1,000 $ range, because we're already damn below production costs in many mines. I don't think it can dip a lot lower than 800 $.
