Fallacies About Gold Continue

This past weekend, I read a popular gold author who proffered many common fallacies about gold and the stock market, and I wanted to set the record straight for our readers with facts rather than with fallacies.

So, let me start by quoting some of those fallacies and then provide you with historical facts which clearly fly in the face of such fallacious statements.  Let’s start with the main points made by the author:

“investors’ interest in gold withers when stock markets are super-high. When stocks seemingly do nothing but rally, there’s no perceived need to prudently diversify stock-heavy portfolios with counter-moving gold. It falls out of favor.”

Well, one does not have to look too far into history to identify the first point in time which invalidates this premise.  All one has to do is look back to the first half of 2016 and you will see that the stock market and gold both entered into very strong rallies together.  In fact, this was one of the strongest rallies in gold in recent times, and it was accompanied by a strong stock market rally as well.

Next, how about if we look back to the 2003-2007 time period.  During that time, both gold and the stock market enjoyed multi-year rallies.  But, I thought gold was always “counter-moving?”  These two instances provided us with massive moves in gold which accompanied market rallies.  And, anyone who maintained an expectation as presented by this author was likely scratching their head while remaining on the sidelines for massive rallies in gold.

“Gold investment roars back as stocks roll over.”

This is one of those statements that simply fail when pointing to one of the worst periods of stock market roll overs in recent times.   In fact, the 2008-09 time period was clearly the worst financial crisis we experienced since the Great Depression.  It was a period of time where you would clearly have expected that investors would flock to gold as the “safe haven” this author presents to us as the obvious choice for investors.  In recent times, we have not seen a more crucial period of time during which investors would have needed the supposed safe haven to market volatility that many believe gold provides.

But, during May 2008-March 2009, when the stock market entered into the most extreme segment of its decline, gold lost a little more than 30% of its value during that same time period.  Most gold-bugs fail to point this out and choose to ignore this while continually reiterating their mantra about the safe haven status of gold. 

“Like all sentiment, that’s the direct result of recent price action.” 

Lastly, I want to address this final quote I read in this author’s recent article.  Consider if we extrapolate what he is saying here.  If what he says is true, then how would the market ever change direction?  Why would people stop selling if more selling makes people more bearish and more buying makes people more bullish?

Unfortunately, this is how most people view markets.  Yet this is not how markets work. If high prices would cause people to be bullish, why would anyone ever sell at high prices if those prices are what make people bullish.  It is circular reasoning at its best. 

Rather, people feeling bullish is what causes high prices.  And, when that bullishness runs its course to its maximum extreme, then there is only one way for such sentiment to turn, and that is the opposite direction, which is what then causes the selling.  And, this arena is where the new and latest psychological and behavioral aspects of market analysis is taking us into the future.

Avi Gilburt is founder of ElliottWaveTrader.net.