As we noted yesterday, the observations we considered are based mostly on macroeconomic analysis. As far as trends go, their understanding is probably excellent. The hard part is tracking sentiment on the way to where it’s apparent the market should go.
For instance, gold didn’t move at all during the 90s. Though the economic indicators were there, it languished in the 250/325 area. Then the 2000s came and gold woke up. Were the economic conditions good in the 90s? No, they were terrible, if not nearly as bad as today. Did the economy get better last February when metals dropped hard? No, especially not in correlation to the drop.
This is sentiment. It points to the path that any asset takes on the way to wherever it is that it’s going. While we might examine metals and say, “They should go up strongly in light of economic conditions and the inevitable demise of fiat currencies,” and I think this is clear enough, we can’t know for sure the timing or path.
The sentiment in the articles referenced points to a dramatic upward move in precious metals. This does not track market sentiment. In fact, more often than not, it’s simply a reflection of where the market’s been. News is always backward looking. And, unfortunately, analysts often have a tendency to look at what happened yesterday and think that the same thing will be happening tomorrow.
When the headlines are calling for new highs in gold at this rate, I grow concerned. I’d love to see it. I’m sure we’ll eventually see it. But I’m a bit alarmed regarding the short-term, and would caution investors to make sure they make level headed decisions regarding metals and not fall into a get-rich-quick mentality, thinking metals will go to the moon within a month or two.
Ed Steer, a self-avowed perma-bull gold bug, offers similar warning in today’s Gold & Silver Daily:
Gold was confined to a one percent gain again yesterday, so Bill Murphy’s first law of the gold market remains intact for this rally so far. Silver did much better, but the shares of both metals stunk up the place. I was underwhelmed.
Harking back to years gone by, such counterintuitive moves in the shares on big up days in the metal prices themselves, was nearly always a precursor to them getting taken out to the woodshed…and it remains to be see whether that happens this time…and how soon.
Being well balanced, Ed also references Eric King’s interview of Egon von Greyerz today, entitled “This Move In Gold & Silver Will Look Spectacular.”
So, perhaps our caution isn’t merited. Only time will tell. Sentiment is a strange thing and markets sometimes do things we simply don’t expect. However, tomorrow I’ll be bringing out some charts to help us think through this that might offer some ideas regarding timing. Again, all we can do is attempt to discern probabilities.
Yesterday I promised a chart today. I’ve attached it and will offer this simple commentary on it before closing for the week.
You can see the RSI that Ed speaks of. On this four year chart, it’s entering overbought territory. On the shorter term charts it’s well into overbought territory. Also, note the very weak volume. This indicates that there is very little buying pressure driving this rise. With this in mind, I’m very cautious about calling for a sustained short-term trend. Perhaps we’ll get a week or two out of this, I really can’t know. But these indicators point toward some consolidation, perhaps even a sharp pullback, before the end of year rally that we expect. At that time we won’t be surprised to see new highs.
For your prosperity,
J. Keith Johnson
The Gold Informant