Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Pre-COVID US Economy Wasn’t All That Great Either - 4th Dec 20
Bitcoin Breath Taking Surge - Crypto Trading Event - 4th Dec 20
Platinum Begins A New Rally – Gold & Silver Will Follow - 4th Dec 20
Don't Let the Silver (and Gold) Bull Shake You Off! - 4th Dec 20
Stronger Risk Appetite Sends Gold below $1,800 - 4th Dec 20
A new “miracle compound” is set to take over the biotech market - 4th Dec 20
Eiro-group Review –The power of trading education - 4th Dec 20
Early Investors set to win big as FDA fast-tracks this ancient medicine - 3rd Dec 20
New PC System Switch On, Where's Windows 10 Licence Key? Overclockers UK OEM Review (5) - 3rd Dec 20
Poundland Budget Christmas Decorations Shopping 2020 to Beat the Corona Economic Depression - 3rd Dec 20
What is the right type of insurance for you, and how do you find it? - 3rd Dec 20
What Are the 3 Stocks That Will Benefit from Covid-19? - 3rd Dec 20
Gold & the USDX: Correlations - 2nd Dec 20
How An Ancient Medicine Is Taking On The $16 Trillion Pharmaceutical Industry - 2nd Dec 20
Amazon Black Friday vs Prime Day vs Cyber Monday, Which are Real or Fake Sales - 1st Dec 20
The No.1 Biotech Stock for 2021 - 1st Dec 20
Stocks Bears Last Chance Before Market Rally To SPX 4200 In 2021 - 1st Dec 20
Globalists Poised for a “Great Reset” – Any Role for Gold? - 1st Dec 20
How to Get FREE REAL Christmas Tree 2020! Easy DIY Money Saving - 1st Dec 20
The Truth About “6G” - 30th Nov 20
Ancient Aztec Secret Could Lead To A $6.9 Billion Biotech Breakthrough - 30th Nov 20
AMD Ryzen Zen 3 NO UK MSRP Stock - 5600x, 5800x, 5900x 5950x Selling at DOUBLE FAKE MSRP Prices - 29th Nov 20
Stock Market Short-term Decision Time - 29th Nov 20
Look at These 2 Big Warning Signs for the U.S. Economy - 29th Nov 20
Dow Stock Market Short-term and Long-term Trend Analysis - 28th Nov 20
How To Spot The End Of An Excess Market Trend Phase – Part II - 28th Nov 20
BLOCKCHAIN INVESTMENT PRIMER - 28th Nov 20
The Gold Stocks Correction is Maturing - 28th Nov 20
Biden and Yellen Pushed Gold Price Down to $1,800 - 28th Nov 20
Sheffield Christmas Lights 2020 - Peace Gardens vs 2019 and 2018 - 28th Nov 20

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Why Gold Might Be Setting Up For a Big Move Higher

Commodities / Gold and Silver 2012 May 10, 2012 - 09:42 AM GMT

By: Michael_J_Kosares

Commodities

Best Financial Markets Analysis ArticleCounter-intuitive forces are at work in the gold market. Europe is moving toward dissolution – erratically to be sure but inevitably nevertheless. Intuition tells us that gold should be moving higher under the circumstances, after all, we are talking about the beginning phases of a major currency, and perhaps economic, collapse.


But it isn't. It is headed south. To what do we owe this curiosity?

The running conflict between rational and irrational forces has become a hallmark of the times. You see, we are increasingly giving over our thought processes in the investment market-place to external trends governed by computers and automaton traders who have nearly unlimited capital reserves they can throw in the direction their algorithmic software is telling them. Thus if the algorithm says that gold goes down when the dollar goes up and that the dollar goes up when the euro goes down, then that is the reality under which we all must live – no matter what our intuitions, or intellects, might be telling us. It used to be "don't fight the tape." Now it's "don't fight the algorithm." Paper, not physical, trades are executed in the marketplace quite often without the intrusion of human contact, and thus the market proceeds as it is directed.

This is a hallmark of our age. And a strange age it is. What we are all witnessing, in my view, is part and parcel of the bubble psychology that dominates our times. With a bit of nuance, it is no different than the bubble thinking that preoccupied Holland during its tulip mania, or France during its South Seas investment scheme or the long list of extraordinary delusions and crowd madness chronicled by Charles Mackay in his now famous tome. Only this time it is driven by machines, a kind of madness that we have hard-coded into software that is running amuck, and no one seems inclined to understand the process, let alone stop it. Though I do not hold out much hope for the euro and the European experiment, at this juncture, I do see a bright future for gold – in the form of a breakdown in this odd, software driven marriage between gold and the euro. This breakdown, once it occurs, will have a catapulting affect on the price, as the reality sets in that the best hedge against what is going on in Europe is not the dollar, but gold.

Delusions, mania are epidemic; your portfolio needs inoculation

In Mackay's book, Memoirs of Extraordinary Popular Delusions and Madness of Crowds, written in 1841, he perhaps unwittingly provides us one of the better templates for modern market behavior. Mackay's mission as he described it in the original edition was "to collect the most remarkable instances of those moral epidemics which have been excited, sometimes by one cause and sometimes by another, and to show how easily the masses have been led astray, and how imitative and gregarious men are, even in their infatuations and crimes." Delusion and mania, as it turns out, are epidemic and they can spread through the population just as insidiously and deliberately as the Asian flu. As a result, just as we inoculate our bodies against disease, we should inoculate our portfolios against the madness of crowds, or machines, if you will.

I doubt Mackay would have guessed that his book would be read, digested and taken as revelation by readers in the 21st century. At the same time, he probably would have not been surprised that the pull of the same dark gravity that caused people to throw their fortunes at tulip bulbs in Holland, or land they never had a hope of seeing in the New World, would be omnipresent in the age of computers, instantaneous communication, and the nearly infinite availability of market analysis. Yet here we are some 170 years later dealing with same dark, inexplicable forces, the same delusional trappings and irrational behavior.

The highly successful 20th century speculator and gold investor Bernard Baruch put his blessing on this book as one of the secrets to his success on Wall Street.

Said Baruch:

"Have you ever seen in some wood, on a sunny quiet day, a cloud of flying midges — thousands of them — hovering, apparently motionless, in a sunbeam? …Yes? …Well, did you ever see the whole flight — each mite apparently preserving its distance from all others — suddenly move, say three feet, to one side or the other? Well, what made them do that? A breeze? I said a quiet day. But try to recall — did you ever see them move directly back again in the same unison? Well, what made them do that? Great human mass movements are slower of inception but much more effective."

This is the same Bernard Baruch who just before the stock market crash of 1929 dumped a good portion of his fortune into gold. When asked why he would do such a thing by the secretary of the Treasury, Baruch replied that he was "commencing to have doubts about the currency." While others banked on the 1920's stock mania, Baruch's intuition was telling him that there was something amiss. He resisted the lure of the crowd. Thus, if you are commencing to have your own doubts about this odd tango being danced by gold and the euro, then perhaps you might want to distinguish yourself from the crowd.

The madness of machines and the China put

Extraordinary Popular Delusions is both complicated and timelessly revealing – a chronicle of herd behavior, delusion, mania, craftiness, and financial loss and gain. It is highly recommended reading and particularly applicable to the situation in which we find ourselves today with respect to the gold market. Solomon taught us that there are no new things under the sun. Mackay teaches us how we might recognize the signs and that the crowd gone mad is a matter to be reckoned with in almost every era – our own not to be exempted. Baruch taught, through his personal investment decisions, that with respect to the madness of crowds and their inexplicable behavior, the best recourse is to run in the other direction. If the madness of crowds, or machines in this case, allows us a buying opportunity, then perhaps we should take it. In fact there are reports this morning of a "semi-official [gold] buyer in Asia." One immediately thinks of the China "put" in the gold market wherein it buys the dips and puts a floor under the price.

Gold protects against these occasional bouts of social madness, and to buy it in physical form – as coins and bullion – is the most effective approach. There is an historical example, directly related to Mackay's book, which illustrates the point. Early 18th century French finance minister, John Law, who perpetrated perhaps the most notorious mania covered by Mackay (the Mississippi scheme) ruined the French currency and, with it, the French economy. Needless to say, the citizenry did whatever it could to shelter itself from the rapidly depreciating paper scrip by going to gold. In one of his final acts before fleeing the country, Law abolished gold and silver coin as a medium of exchange, made gold ownership illegal and closed down the borders to anyone hoping to escape with hard assets. Needless to say, both Law and the public understood the value of gold under such circumstances.

Epilogue: Please resolve pi as soon as possible

With respect to the growing dominance of machines on Wall Street, I recall the old Star Trek episode that involves a visit to a planet where the inhabitants seem to be living in a state of perfect bliss. Captain Kirk knows that this cannot be right. There is no such thing as perfect happiness. As it turns out, the population is controlled not by a loathsome dictator who has drugged the population into compliance, but by a computer that has evolved sufficiently to somehow gain control of their minds. Something must be done, concludes Kirk, to break its hold. Spock comes up with the solution by instructing the computer "to resolve the value of pi" – an impossibility because its resolution, as we all remember from high school math class, is infinite. The computer spends all of its time and devotes all of its resources trying to achieve the impossible and the dictatorial hold it has on the population is released – a trick we might want to keep in mind for the day computers complete their mastery of Wall Street.

For a free subscription to our newsletters, please click here.

By Michael J. Kosares
Michael J. Kosares , founder and president
USAGOLD - Centennial Precious Metals, Denver

Michael Kosares has over 30 years experience in the gold business, and is the author of The ABCs of Gold Investing: How to Protect and Build Your Wealth with Gold, and numerous magazine and internet articles and essays. He is frequently interviewed in the financial press and is well-known for his on-going commentary on the gold market and its economic, political and financial underpinnings.

Disclaimer: Opinions expressed in commentary e do not constitute an offer to buy or sell, or the solicitation of an offer to buy or sell any precious metals product, nor should they be viewed in any way as investment advice or advice to buy, sell or hold. Centennial Precious Metals, Inc. recommends the purchase of physical precious metals for asset preservation purposes, not speculation. Utilization of these opinions for speculative purposes is neither suggested nor advised. Commentary is strictly for educational purposes, and as such USAGOLD - Centennial Precious Metals does not warrant or guarantee the accuracy, timeliness or completeness of the information found here.

Michael J. Kosares Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules