All of us know first hand how our individual psychology as well as social psychology plays great role in our trading and investing decisions. There is no better time to understand this easily more than time of bubbles and busts. Cheer confidence boarding on arrogance at the top and complete absence of it that is boarding on utter dismay at the bottom. Most of us suffer this and few are exempt.
In trying to understand the latest and not too surprising gold euphoria after breaking the $1000 magic level (same happen to oil when we broke that $100 level) to gauge the current psychology behind it and compare it to the previous one in 2008, I went to read the recent blogs of TMFSinch who easily can be thought of as extremely bullish on precious metals if not a gold bug. No pun intended. Although I wasn't planning to share my findings so I don't create any fractions, I changed my mind and thought it is very valuable to share and a must read if you are really thinking of jumping into the bandwagon of precious metals for whatever reason you came to that decision.
I respect Sinch's sincere efforts towards sharing his research with others and even overlooked his not too tolerant attitude towards my disagreement (right or wrong) with his calls especially the one about gold will NEVER go below its 2008 low let alone now under $1000.
He might be completely right, which I told him many times but certainly there is a chance that he can be wrong.
He doesn't think so AT ALL. No chance in his mind and he will proudly tell you so. This mindset qualified his psychology "through his blogs" for this article. This is not a personal analysis of his character. I don't know the man. This is an evaluation of his "investment psychology", which doesn't take anything away from his character as a person.
First let me be clear that I don't recommend buying or shorting anything. I only share the tools that I use in hope it adds value to your thinking and tool-box. When I share that I am shorting or buying something, I never ask anyone to do the same. I only use it to demonstrate. For disclosure, I stopped trading gold after my successful call in February 2009 top and shifted course to silver, which didn't disappoint me so far. After the latest euphoria in miners, I went back and shorted them through GDX and still hold my position.
Know that all my writing about gold and silver is to share my worry about many people buying into the herd mentality currently present in Precious metals especially in miners and buying at what I believe to be unsustainable prices in upcoming deflationary phase. All I ask of you is just step to the side from the sector and wait. If I am wrong, all you will miss is an opportunity but if I am right, you will be in a better position to load the wagon at better prices and terms with far less risk than currently present.
If you had the insight and luck to capture this great move to the upside from lower level, good for you. Time to reduce your positions sharply and lock your profit. When Bullish sentiment for gold is above 90% for more than 20 consecutive days extreme record and silver bullish sentiment at near record extreme 95% according to DSI, then I believe time to hit the exit and leave whatever left if any on the table. Be grateful, fearful, and not greedy.
On the other hand, Sinch is on a crusade for salvation from the US dollar towards the promised golden land. He is urging people so passionately to jump into the train NOW before it passes them. If he will be wrong, it will be extremely costly endeavor because of his bullish investing in miners as it was the case in 2008.
I hope when you will read what his stance back in 2008 gold euphoria was, you will understand how psychology and fear of missing can cause great damage beyond repair. The following is what he advised others to do at similar extreme zealous bullishness not far from or different than the current ones. It ended in a quick reversal for those who started their positions at the top and can end the same way now. Those who were stubborn enough to hold on their losses, they are barely breaking even today if not under water after two years of investing in the over-rated miracle sector since early 2008. If they decide to start the course again at these levels, they might have a painful redux experience.
Only time will tell who was prudent and who was not.
Never forget - Price is the arbiter of all matters when it comes to financial decisions. No matter how great your thinking or analysis is, it ain't worth a thing if the price won't match it.
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April 18 2008 - Gold @ top $930 - "Final Dip of the Precious Metals Correction - all aboard for $1,200 gold"
July 11, 2008 - Gold @ top $960 - "Major Breakout for Gold! Got Gold?? Gold broke through major resistance this morning at the $950 level... actually it pounded through it.. pushing well into the $960s!! Silver flirted with $19. The gold correction which began in March is all but over, with only minor resistance remaining at the $990-$1000 area before we march up towards $1,200. Got Gold?????? Got Silver?????"
July 13, 2008 - Gold @ top $955 - "Enormous Inflow of Investment Capital into Gold this Week - Chart of GLD Holdings Says it All... Got Gold?"
November 30, 2007 - "NovaGold [@ $9.61]* is my personal screaming buy of the week! I think anything under $10 is dirt cheap for this stock!"
January 03, 2008 -"When I posted the above note, NG had fallen from near $20 to about $9. In the ensuing weeks, it was beaten down to truly ridiculous levels, bottoming out with the clearest bottom I've ever witnessed. I bought in HUGE in this company at $6, and a week later it's back up to $10 (1/3/08). Some reading this might think the opportunity has passed, but what I wrote weeks ago remains just as true today... NG is a terrific value near $10 as well. It's going back to $20, as the deal which fell apart because the project was considered too expensive will be reconsidered shortly in the context of a new set of realities for spot gold. The project metrics with Teck Cominco were calculated based upon $650 gold, and it failed to impress by a narrow margin... this project becomes considerably more attractive with gold sustained over $800, and especially over $900 where it will soon be! Buy buy buy... and especially if market players are able to bat this one down once again... if it retreats to $9 or less.... back up the truck... this one's going to the moon! Easy double..
April 15, 2008 - "NovaGold [@ $7.54] Swings to Profit - Still Time to Get In"
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While gold was near all time high of $1000 back in 2008, the above statements, which are not selective or biased but a representative sample from the tens if not hundreds of calls to urge people to jump in at these prices calling it "the last possible cheap prices to buy precious metals and miners".
The results for these calls?
Gold kept falling until late October to $681, silver to $8.40, and miners were literally wiped out (see a chart at the end of this article for your return on investment if you bought and held with these calls as a euphoric investor did and proudly advised everyone else urging them to do the same).
*NovaGold (chart above) went as low as 45 cents (Yes! You read that right. Less than half a dollar!) from top $21.91 on November 05, 2007 less than three weeks earlier from the bullish call @ $10. That means it was slashed to half in less than three weeks and then followed up to accumulate 95% loss from the cheap $10 mark until it bottomed in December 2008. Frankly, I am not sure how many people who bought @ 10, 9, 8, 7, or even 4 dollars kept their position until less than 50 cents?
Best price for NovaGold since then is $6.81 just few days ago and current $6.05!!!! This is where the moral of the story even get more vividly enlightening. After two years, another bubble rally of 1600% from low 45 cents (chart), and the "great gold rush" to $1200 -guess what- a "dirt cheap NG" is still even dirtier. 50% below its recommended cheap price of $10 during the 2008 gold euphoria!
Catching my drift, dear brothers and sisters?
If you avoided buying the top and instead stepped aside until the bubble phase is gone, then you would have the cash to buy as much as 25 to 50 times the amount of stocks for the same price! Not this only but also you will have the chance to gain as much as 1600% return. But if you were afraid to miss the express train to riches and got in @ $20, bought huge @ $10 and backed up the truck to load at $7 while the underlying assets (precious metals) are in a bubble phase, then today you are down 50% at best and worse the experience might broke your spirit and confidence, decided to sell at a loss of as much as 95%, and swore to never touch a miner or stock at that matter again losing the true opportunity for huge gains.
Same story can happen again from whatever your miner price is at right now.
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What about his current stance? The same EXACT tone and over bullishness.
November 25, 2009 - "The Unbelievable Bargain of Silver" [Silver @ $19 AGAIN!!!]
December 04, 2009 - Gold at $1200 -
"There is no bubble. Bull markets pause and correct ... corrections and bubbles ARE NOT THE SAME THING!!!"
"I could see this correction taking us to $1,100, or possibly even $1,050. $1,000 is possible, but only with a surprisingly strong dollar rally."
"I will begin nibbling in earnest near $1,100, while I would get more aggressive building positions at $1,050."
"I fear that those who just wait for $1,050 to get long again could easily be left behind."
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Uh! You just read it! Fear of missing!! Fear none, my friends. One of my trading and investing rules that I live by is "Opportunities are made up easier than losses. Don’t let the fear of missing trigger emotional financial decisions."
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What about his call on the dollar, which is one main reason why he is so bullish on gold and silver?
May 02, 2008 - [Dollar @ rock bottom LOW 72.60] -
"Counterspin: The US Dollar Index in Context. The Rally is Pure Fiction."
The [US dollar] chart clearly demonstrates that there is nothing unusual happening with the dollar right now... these minor consolidations have occurred at frequent intervals all the way down. Objectively I know that nothing fundamental has changed to create meaningful support here. This amount of spin being devoted to the dollar right now is understandable, but disconcerting. And to the extent that Fools alter their investment strategies accordingly, it is potentially injurious. Please be careful here, as this has all the earmarks of a massive head-fake.
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Now, if this is my personal adviser, I would fire him. Plain and simple. Over bearishness on the dollar and Not heeding the signals that the dollar was bottoming is what caused major and serious unhealed injurious across the board. NOTHING was left alone. All went down, while the dollar skyrocketed to 90 in a massive move!How about his current position towards the dollar now?
November 24, 2009 - "Have we Crossed the Rubicon? The dollar and its diving." [dollar @ LOW 74.30 AGAIN!!!]
As he will so confidently will tell you, NO chance for the dollar to go anywhere but south until toilet paper becomes more valuable than it. Will we instead have even a stronger move in the US dollar than we had in 2008?
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To illustrate the euphoria psychology, you need no more than his calls on other metals that was clearly and obviously in a HUGE bubble. Even more clearer than precious metals but he failed to recognize that because he was afraid to miss an opportunity than be prudent. All the hallmark of a euphoria despite what he might try to convince me with. Read for yourself a representative sample of his many recommendations.
July 08, 2008 - couple % points below the all time high of all industrial metals!!! -
"A painful blip on the screen for us commodity longs - This an incredible opportunity for Fools sitting on cash!"
I always try to keep at least SOME cash on the sidelines for times when the market becomes this irrational, but this time around I have no reserves to take advantage of today's incredible buying opportunities. however, today is about as obvious a buying opportunity as I've seen in quite some time. Bargains abound outside of gold and silver today, too. ACH under $27 even as Aluminum prices have cruised higher.
And coal? PCX under $120?? MEE down to $70 from its recent high of $95. Pretty much any coal name is a buy here, as higher coal prices will be with us through 2010 REGARDLESS of what oil does.
And metals recycling names... they never should have been included in this sell-off. They are all buys here... MEA, CMC, SMS, SCHN [see my recent blog post].
Big names like RIO at $31... ludicrous! Buy buy buy!
July 10, 2008 - "Copper Heading to Fresh Peaks on Strong Demand from China; Aluminum is a Coiled Spring!"
September 3, 2008 - "Joy Global quarterly results provide excellent confirmation the commodity bull remains strong!!!"
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So as euphoric investors do, they run out of cash AT THE TOP and then go to ask others to join them to buy, buy, buy! This is one reason why bubbles end in bust. Investors are over extended because they kept chasing until, well, they ran out of money. When the market pull the rug for whatever reason and many who have well established positions exit, the exit is too tight. There is NO more money to add and all longs will hope for is that somehow the slide will stop and their positions will revive. Once the euphoria trend breaks, shorts also will join the feast and later the psychology of despair will add to the mayhem when those who chased get their fingers if not arms and legs cut in front of their eyes and they decide to bailout at the wrong time to relieve the psychological pressure.
Do you want a proof? The following were the results for these calls to buy and hold while euphoria was the norm of the day?
Cooper lost 70% since that day and Aluminum lost whopping 87% until both bottomed respectively in December 2008 and March 2009. ACH went down from cheap $27 to $7.22 - PCX from most affordable $85 to $2.76 - MEE (from $95 to $9.52) - MEA (from $18 to $1) - CMC (from $34 to $6) - SMS (from $35 to $7) - SCHN (from $100 to $17) - JOYG (From $73 to $15). And for sure none of these cheap goodies and "fundamentally sound" -pun intended- ever saw these highs again until today (or will see anytime soon), not even recovered half of it and some are still 80% below that high!
We are not talking traders here. This was a buy and hold strategy with only 10% to sell when he feels these stocks are overvalued!! For sure there were never new highs ever more than that to sell into. It was down fast and furious from then.
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Now that I illustrated clearly to you how the euphoric investor thinks and how much damage can happen if you decide to join it, to put things into prospective, here is a chart that illustrate the foolish believe that gold, silver, and miners are better than the US dollar for the last TWO YEARS (the time frame for the calls above). You will see the return on investment in all four in one chart. It will be obvious that even with gold's parabolic move that will die as fast as it went up, the US dollar was in 2008, is in 2009, and will be in 2010 a better choice for prudent investors who wanted to safe guard their wealth, just on its own!!
Enlarge Chart - After you click scroll down the chart for all four
Here is another chart, which is not related directly to the topic of this chart but an eye opener. It is for those who believe that gold is a protection of wealth. According to this chart, if you put your money there, you would have lousy return of 73% after 30 years (all of it was in the last two and half years only). You could even barely break even if you put your money earlier than the limit of this chart!!! This is far lower than just putting your money in the SPX where you should get as much as 1250% return (without dividends reinvested).
Bloomberg had an article titled, "Gold Can’t Beat Checking-With-Interest 30 Years After Last Peak".
"Investors who paid $850 an ounce back then earned 44 percent as gold reached a record $1,226.56 on Dec. 3 in London. The Standard & Poor’s 500 stock index produced a 22-fold return with dividends reinvested, Treasuries rose 11-fold and cash in the average U.S. checking account rose at least 92 percent. On an inflation-adjusted basis, gold investors are still 79 percent away from getting their money back."
Think about it.. just checking account with meager safe bank account interest rate will beat your precious metal for the last 30 years! That said, I will say that dollar (due to inflation) rank as gold as lousy long-term investment and both are weapon of mass destruction to our wealth.
As usual, I hope this will find you and yours as much as you wish for yourselves. Be happy and remember to make a positive difference in someone's life.
PS. Please rate this article on the top
GoodVibe
Mr. Lucky
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