Oh, the humanity.
It's certainly pretty nasty. I mentioned in a comment a while ago that I was open to buying some gold at some point, and that I felt arrogant enough to declare that I would 'know' when that would be.
This ain't it, I don't think. Not by a long chalk. My little lemur purse is staying firmly closed.
To trade commodities at the moment, a class of investments of which gold is most assuredly a member [I suspect that JdA only says things like that to give Victor the Cleaner palpitations - Ed.], one needs not many more tools than a standard fib chart and a sense of momentum. The latter can be mathematically expressed as RSI, stochastics or MACDs, etc., or one can simply develop a 'sense' of when momentum is about to be born or die. The former is based on a few numbers that have no particular special significance in the markets beyond sufficient traders and algorithms being primed to follow them. This is my pre-emptive response to chart-mistrusting commenters such as Duggo: I agree fully that charts are based on no firmer principles than reading cattle entrails. But if the big bad trading computer is programmed to buy or sell based on cattle entrails, one would do well to take an interest in them.
So, I present my standard fib chart since gold's all-time high in September 2011, which you've seen at Screwtape several times before. The 38.2% retracement line has just been broken to the downside:
You will note that each time previously the 38.2% retracement line has been broken to the downside a full retracement to the 0% line has only been a few months away. Perhaps my line is not quite in the right place (I think it is, actually): all that would mean is that we are now on the cusp of either the smartest buy in gold in ages, or the last chance to sell before something really horrible. You will also note that this fib line coincidentally (?) comes in at the same point as GM's longer term trend line in his post of today.
Bulls lacking in confidence; bears creaming themselves:
A landmark year in the gold bull:
There's one final factor, and it's something that as a bear I am watching closely:
2012 could be the first time during the bull that gold finishes the year lower than it started it (i.e. $1603.60).
One of the great rallying cries one reads everywhere on the silverogosphere is that gold has netted an average of 20% a year for the last ten years. How true is this?
Well, actually from Jan 2002 (being generous) to Jan 2012 it worked out at an average of 21.8% per year, so that's a pretty good meme as memes go. However, there's a sting in the tail: when it stops being true, does that mean that the gold run is over?
Let us pause to consider that there was even a rise (albeit small; 1.6%) in the worst financial year in human history, 2008, when human beings were getting ready to have their final amorous encounter, eat each other, and barter in acorns. The 'great correction' of 2004 worked itself out and still returned 6.0% - equivalent to the return from a few bank accounts at that time.
So, philosophically, what would it mean if 2012 actually delivered almost no return - or, hush when you say it, a loss? Bearing in mind that this was the year of "QE to infinity! (c)", of the impending fiscal cliff, and of a concerted world-wide money printing effort we have never seen the likes of (at least in terms of coordination). The stubborn refusal of gold to perform under such conditions - for a whole year - for more than a year, in fact - must, on some intellectual level, be addressed.
OK - we're not there yet, and none of this might come to pass. Gold could finish the year at $1700, for a crappy 6% return. But even that demands an explanation. Why not 20% this year, given my previous paragraph?
Could it be that (as I believe) gold is already dramatically over-priced? So no amount of fear or printing will stop the correction that is needed to finish the mania-piercing job that began in September 2012? Could it be (as I also believe) that gold has no particular fundamental problem, but is unattractive compared to productive assets at the beginning of a climb out of recession in western economies (buy low, sell high...)? Could it be for other reasons? - I personally discount 'manipulation', because it is obvious to me that gold has, if anything, been manipulated higher for a decade.
Regardless of what you believe, you cannot ignore this. Gold in 2012 has given us a stupendous hint of topping out. The worm is turning. The bears have got wind in their sales. Call it what you like. Scream at the injustice of it all, if you want. Rejoice! (c) and stack some more. Go ahead. But unless one can produce a coherent argument as to why 2012 was so utterly different to the preceding years, and why this was but a perverse anomaly, one's investment thesis for going long gold is busted. And that's not a smart way to invest. That is, in fact, a strategy for extirpation by the bears.
One final thought:
Every single person who told their readers to buy gold (and hold it) this year was wrong.
Even if you're evens, or slightly up (buying at the year's lows), the opportunity cost of this year's gold misinvestment is considerable. And for the vast majority, they'd have been better off keeping their fiat under the mattress. Now that is a sobering thought.
ADDENDUM (21/02/2012): Following the traditional quarrel in the comments about the merits or otherwise of TA, S Roche has kindly sent me the following chart and comment, which I think deserves insertion here:
I come across a lot of people who don't trade who laugh when I show them a potential inflection point on a chart, and tell them from that point it will either go up or down. They just want to know which way it will go, and they want to know it now.
Some of these people still don't get it when I say, wait for that moment and, depending on whether it goes up or down at that point, place your trade accordingly.
Here is a reasonable example, per my suggestion above:
There are a lot of good books on the subject and some people make a reasonable living at it.