Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
UK Energy Firms Scamming Customers Out of Their Best Fixed Rate Gas Tariffs - 23rd Sep 21
Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Should School Children be Jabbed with Pfizer Covid-19 Vaccine To Foster Herd Immunity? - UK - 23rd Sep 21
HOW TO SAVE MONEY ON CAR INSURANCE - 23rd Sep 21
Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
Trading Crude Oil ETFs in Foreign Currencies: What to Focus On - 22nd Sep 21
URGENT - Crypto-trader event - 'Bitcoin... back to $65,000?' - 22nd Sep 21
Stock Market Time to Buy the Dip? - 22nd Sep 21
US Dollar Bears Are Fresh Out of Honey Pots - 22nd Sep 21
MetaTrader 5 Features Every Trader Should Know - 22nd Sep 21
Evergrande China's Lehman's Moment, Tip of the Ice Berg in Financial Crisis 2.0 - 21st Sep 21
The Fed Is Playing The Biggest Game Of Chicken In History - 21st Sep 21
Focus on Stock Market Short-term Cycle - 21st Sep 21
Lands End Cornwall In VR360 - UK Holidays, Staycations - 21st Sep 21
Stock Market FOMO Hits September CRASH Brick Wall - Dow Trend Forecast 2021 Review - 20th Sep 21
Two Huge, Overlooked Drains on Global Silver Supplies - 20th Sep 21
Gold gets hammered but Copper fails to seize the moment - 20th Sep 21
New arms race and nuclear risks could spell End to the Asian Century - 20th Sep 21
Stock Market FOMO Hits September Brick Wall - Dow Trend Forecast 2021 Review - 19th Sep 21
Dow Forecasting Neural Nets, Crossing the Rubicon With Three High Risk Chinese Tech Stocks - 18th Sep 21
If Post-1971 Monetary System Is Bad, Why Isn’t Gold Higher? - 18th Sep 21
Stock Market Shaking Off the Taper Blues - 18th Sep 21
So... This Happened! One Crypto Goes From "Little-Known" -to- "Top 10" in 6 Weeks - 18th Sep 21
Why a Financial Markets "Panic" May Be Just Around the Corner - 18th Sep 21
An Update on the End of College… and a New Way to Profit - 16th Sep 21
What Kind of Support and Services Can Your Accountant Provide? Your Main Questions Answered - 16th Sep 21
Consistent performance makes waste a good place to buy stocks - 16th Sep 21
Dow Stock Market Trend Forecasting Neural Nets Pattern Recognition - 15th Sep 21
Eurozone Impact on Gold: The ECB and the Phantom Taper - 15th Sep 21
Fed To Taper into Weakening Economy - 15th Sep 21
Gold Miners: Last of the Summer Wine - 15th Sep 21
How does product development affect a company’s market value? - 15th Sep 21
Types of Investment Property to Become Familiar with - 15th Sep 21
Is This the "Kiss of Death" for the Stocks Bull Market? - 14th Sep 21
Where Are the Stock Market Fireworks? - 14th Sep 21
Play-To-Earn Cryptocurrency Games Gain More and Is Set to Expand - 14th Sep 21
The CashFX TAP Platform - Catering to Bull Investors and Bear Investors Alike - 14th Sep 21
Why every serious investor should be focused on blockchain technology - 13th Sep 21
SPX Base Projection Reached – End of the Line? - 13th Sep 21
There are diverse ways to finance the purchase of a car - 13th Sep 21
6 Tips For Wise Investment - 13th Sep 21 - Mark_Adan

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

How NOT to Invest in the Gold Market

Commodities / Gold and Silver 2016 May 26, 2016 - 10:45 AM GMT

By: Jason_Hamlin

Commodities

Investor psychology is an interesting phenomenon to study. Despite the obviously negative implications, a large percentage of investors have a tendency to buy high and sell low. When the price has been rising and everyone is bullish, they decide to jump in near a top. When prices are dropping sharply and everyone is selling, they get fearful and decide to exit their positions near the bottom.

Herd mentality, or mob mentality, describes how people are influenced by their peers to adopt certain behaviors, follow trends, and/or purchase items.


Investors looks for social proof around them. If they see others making money buying certain sectors or stocks, they decide it must be a good time to buy and they follow the herd. And if everyone is selling, they panic and decide it must be a good time to sell. This is a recipe for financial disaster.

Investors like making money, but hate losing money a lot more. The good feeling of a 50% gain is not nearly as intense as the bad felling of a 50% loss. This is why when there is a large drop and money is lost (on paper), investors are shy about buying more and freeze up at exactly the moment they should be buying. Still feeling the sting of a decline, investors rush to exit their positions for fear of losing more, regardless of the fundamental and technical factors.

And on the other end of the spectrum, most investors buy when prices are high because they haven’t lost anything and feel good about paper gains they have generated. They also feel good about the future direction, because the most recent direction has been favorable. As emotional beings, we buy when we feel good after gains (greed) and sell when we feel bad after losses (fear).

Human emotions have a huge impact on the markets, distort prices and create opportunities. In poker, players that do not allow their emotions to get the best of them (avoiding tilt) are almost always going to outperform emotional players. It is the same in the investing world. The more you are able to invest as a rational, fact-based, data-based investor and less as an emotional being, the more success you are likely to experience. This means being able to go against the herd, avoiding any feelings of discomfort from not going with the crowd and aligning with your peers.

Successful investors must find the fortitude inside to be a contrarian and run against the herd. Successful investors will buy when others are fearful and sentiment is negative and sell when others are greedy and sentiment is positive. It is difficult to do, especially when you first break the mold and force yourself to do the opposite of everyone else around you.

Investor Paralysis

Another interesting phenomenon I have observed with gold investors is emotional paralysis. Rather than emotions encouraging them to buy at tops and sell near bottoms, their emotions keep them out of the market entirely. Their fear always comes up with a reason not to participate and forces them to stay on the sidelines at precisely the wrong times.

For example, many investors feared that gold would drop below $1,000 and maybe fall as low as the $700 price point that people like Harry Dent were predicting. So, those investors did not buy when the price started showing signs of bottoming around $1,050 to $1,100. When the price began moving higher in January, they still watched from the sidelines, waiting for some definitive confirmation that prices would continue climbing higher.

Soon, gold climbed 10% higher, but their fear convinced them it was just a dead-cat bounce. Then gold climbed roughly 20% and silver nearly 30%. Many mining stocks doubled, yet these investors remained on the sidelines. But they did it for a different reason. Now it wasn’t because they feared gold would drop to $700, but because they feared that they had missed the move higher and that the gold price couldn’t possibly continue climbing.

But prices did continue to move higher, with gold eventually climbing above $1,300 and silver above $18. Quality mining stocks provided leveraged gains, with several miners rocketing 200% to 300% since the start of 2016.

Fearful investors missed this entire move and lamented their inaction from the sideline. They now commented that if only precious metals would pull back, they would be able to buy on the dip and get better prices.

These levels proved to be a short-term top and prices have now pulled back considerably with gold at $1,220 and silver at $16.20. The correction that fearful investors had been wishing for has occurred, yet they still will not buy. Why not? Because gold and silver could continue lower and short-term sentiment appears bearish.

And when gold prices finally bounce, they will once again fear it could be the dreaded dead-cat bounce? So they wait for prices to continue higher, which often happens very rapidly. By the time they finally work up the nerve to buy, prices are back where they were when they were considering buying but wanted to wait for the dip. You know, the dip that just occurred in front of their eyes? This is investor paralysis in a nutshell.

Buying the Dip in Gold

Tuesday was undeniably brutal for gold investors. Some of our favorite mining stocks were down 10% or more in a single day. There is a bit of blood in the streets and it could certainly get worse. Timing short-term movements in such a volatile and manipulated/leveraged market is nearly impossible. So, what is a gold investor to do?

As a veteran of multiple gold bull and bear markets, I try to keep my emotions in check and avoid panic selling. At Gold Stock Bull, we booked profits on a few profitable positions a couple of weeks ago. But we are holding core positions and looking to add new positions on this dip.

I know that I will not be able to time the bottom perfectly, so I buy in tranches. I may put 1/3 of my available cash to work this week, 1/3 next week and 1/3 the following week. Using the approach I reduce the risk that I will mis-time my new purchases while also increasing the odds that I pick up some shares at an intermediate bottom.

I also try to maintain perspective by remembering that although we have given back some gains this week in our remaining position, many of these stocks are still up over 100% year to date. Fearful investors can only see the day’s losses and focus on the short-term. They are feeling the pain of the loss and losing perspective on the long-term investment strategy and trajectory for the gold price.

I’ve had a few subscribers ask if my confidence in the medium and long-term bullish outlook for precious metals has been shaken.

It has not. These types of pullbacks are a healthy and normal part of any new uptrend. I don’t believe the FED will be able to hike interest rates in June. They might do so by the end of 2016, but even then it will only be a move of 25 basis points. Anything more and they risk throwing the equity, bond and real estates markets into a tailspin. The FED knows this, but they like to keep the markets thinking that the economy might be healthy enough to raise rates significantly. It is not.

I think gold is likely to find support around $1,175 to $1,200 and silver around $15.50 to $16. This would be a 50% retracement of the advance from their late 2015 lows. Gold has more immediate support around $1,206, which was prior support and also the Fibonacci 38.2% retracement level. The RSI is pointed lower and still has a bit of room to drop, so I suspect we will see gold retreat to somewhere in between $1,175 and $1,206.

When the FED fails to raise rates in June, the market will realize that precious metals were incorrectly sold off in anticipation of this phantom rate hike. There will be an upward revaluation of gold and silver prices. This bounce will be even more pronounced in mining stocks, which have been offering leverage of 3X the move in the underlying metals this year. They may pull back 20-30% during this correction, but are likely to rocket to new highs in the second half of the year.

So, I believe it is wise to buy this dip in tranches with the expectation that both gold and silver will make new highs during the back half of the year. The FED meets on June 14-15 and I would be very surprised if they were able to raise rates. But we should also keep in mind that a 25 basis point increase is fairly insignificant in the grand scheme of things. And even if they raise rates, gold has a fairly strong history of advancing alongside interest rates.

It is usually the fear of rising rates that can hurt the gold market much more than the actual movement of rates higher. This was evident as the gold price finally rocketed higher just after the FED announced the first rate hike in December. The market didn’t care. If anything, the bounce in gold and silver prices showed that market participants were relieved of the constant speculation and indecision over interest rates.

I think the same thing is likely to happen again, should we see another rate hike. And if the FED balks, I would hope investors would start to realize that the rate hike game is just a psychological strategy aimed at manipulating investors and not honest policy decision. Which raises the larger point of why we have a small group of bankers fixing rates rather than allowing the free markets to naturally find the proper equilibrium. But that is a whole separate article.

Since the beginning of this advance in precious metals in late December, we’ve had two relatively short and shallow corrections. This once has been a bit more severe, but I believe it will turn out to be a buying opportunity. To maintain some semblance of sanity, gold investors are encouraged to take a long-term view and not stress the daily or weekly volatility inherent in this market. Buying near multi-year lows, just above the cost of production, is not likely to be a bad move.

Summary

In summary, here is how NOT to invest in gold:

  1. Be scared to buy gold at multi-year lows near the cost of production because everyone seems bearish and Harry Dent says it will drop to $700.
  2. Be scared to buy the bounce because it might be a dead cat bounce.
  3. Be scared to buy the continuation rally, because you already missed a big move.
  4. After wishing for a pullback, be scared to buy the dip because others are suddenly bearish.
  5. Be scared to buy the bounce after the dip because you missed the absolute bottom.
  6. Wait until gold is making new multi-year highs and everyone is bullish, then buy near an intermediate top.

Of course, this is all easier said than done. But hopefully if you are part of the ‘buy high, sell low’ crowd, this will encourage some reflection on your investment strategy and the dominance emotions have over your investment decisions. If you want to follow when we are buying or selling, which stocks we hold and the steps we are taking to maximize profits, click here to become a Gold Stock Bull Premium Member.

It is less than $1 day and we offer a 30-day money-back guarantee. If you don’t find value in the service, just ask for a full refund and keep all of our stock picks and special reports for free!

By Jason Hamlin

http://www.goldstockbull.com/

Jason Hamlin is the founder of Gold Stock Bull and publishes a monthly contrarian newsletter that contains in-depth research into the markets with a focus on finding undervalued gold and silver mining companies. The Premium Membership includes the newsletter, real-time access to the model portfolio and email trade alerts whenever Jason is buying or selling. Click here for instant access!

Copyright © 2016 Gold Stock Bull - All Rights Reserved

All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise. The information on this site has been prepared without regard to any particular investor’s investment objectives, financial situation, and needs. Accordingly, investors should not act on any information on this site without obtaining specific advice from their financial advisor. Past performance is no guarantee of future results.


© 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