Should You Sell Gold If The Stock Market Rallies To 2500?

Sunday, April 10, 2016

gold question Bearish Tendencies

Most of you come to financial websites to read the latest insights of how the equity markets are about to collapse.  You seek to reinforce your steadfast beliefs that the equity markets are all smoke and mirrors and really should not be as high as they are.  And, almost all of you believe that the only way they have risen to these levels is due to manipulation.  Moreover, you maintain that gold will be your savior when the world as we know it ceases to exist.

But, have you ever considered that those that have been calling for such financial collapse have been saying the same thing for years, if not decades, yet the markets continue to move to much higher levels than you have been told were even possible?  Think about it.  How many articles have you read in just the last month calling for the imminent collapse of the market and our financial system?

Most of the articles you read about the imminent collapse of our financial system are based on very reasonable perspectives.  They provide you very well-reasoned arguments as to why the system is on the verge of falling off the cliff.  But, despite all these wonderfully presented arguments, the markets have continued to climb higher than any of the authors of these articles have expected.  As Keynes said, markets can remain irrational longer than you can remain solvent. 

You see, markets are not driven by reason, but are, rather, driven by irrational sentiment, and Keynes clearly recognized that.  Until you accept that your reasoned approach to markets does not work, you will likely remain on the wrong side of the market.  When was the last time you sought out a logician for analysis about the market?

So, why have you continued to believe in such analysis, despite its clear lack of prescience?  Yes, yes, I know, the crash is certainly going to happen tomorrow.  I know you believe in your heart of hearts that these market heights are unsustainable, and the party will end.  But, how has this served your investment accounts?  Not, likely, very well.

Why Are You So Bearish?

As human beings, we have a tendency to become hyper-focused upon all these types of negative stories, and this is why doomsday predictions are so popular and sell so well.  And, until you learn why you gravitate to such stories, you will likely remain on the wrong side of the market.  I suggest you read this article to develop a better understanding of yourself, and why you gravitate to such well-written stories that keep you on the bearish side of the equity markets no matter what it does: http://www.marketwatch.com/story/why-is-everyone-so-bearish-2016-01-10

I am sure if I tell you that we will likely see the S&P500 rallying to 2,500+ within the next few years (even if we first see a correction down to the 1600-1700 region) you will likely believe that it is certainly not possible and not going to happen.  But, for hypothetical purposes, let’s assume the market rallies to 2,500.  And, based upon all you read, it is supposedly a fact that gold is negatively correlated to the stock market.  Every week, and sometimes even every day, you read how gold will go up when the stock market crashes.  So, does that mean you should sell all your gold if the stock market does not crash, but goes up another 20-30%?

Do Not Trade/Invest Based Upon Logic or Fallacies

If you are actually contemplating the logic behind this proposition, then, clearly, this is another instance where you have been sold a load of goods about the relationship between gold and the equity markets.  History does not prove this to be an accurate proposition, despite its seemingly logical basis.  Again, markets have nothing to do with logic. 

You see, there are many common fallacies about how gold is related to the equity market, most of which present a negative correlation.  But, as I have mentioned before in prior articles, relying on such fallacies will only lead you to the wrong conclusions. 

Rather, there are times when gold rallies along with a stock market rally, and there are times when gold drops while the stock market rallies.  And, there are even times when the gold and equity markets drop together.  But, unless you have the tools to understand how each market moves on its own, you will likely be quite confused when you see some of the market movements I expect over the next 5 years.

Now, before you think that I go through life wearing rose colored glasses, I can assure you that I am simply a realist whose sole interest is to increase my net worth, along with the net worth of those that follow my analysis. In fact, while most were shorting this stock market rally over the last two months, we were among the few that have made a killing on the long side. And, along with being a realist, I recognize the potential for the stock market to head toward much loftier levels, which many of you now view as impossible.  But, I am also a very long-term gold bull and I see no conflict in the two. 

Moreover, you would not likely ever see me holding or suggesting a long-term investment position in any major bank, as I, too, view them as “sick.”  Big banks are unhealthy in most of the long-term charts of our financial system.  This does not mean the collapse is imminent, and I see the potential that this can continue for several more years before the financial system experiences stress similar to that seen in 2008.  But, during such time, I think we can see metals rally alongside the equity markets, which is something very few expect, or will even suggest, since it does not align with their bearish world perspectives.

But, ask yourself one question: How has their bearish perspective on the equity markets and bullish perspective on gold served them for the last 5 years?

Avi Gilburt

Avi Gilburt is a widely followed Elliott Wave technical analyst and author of ElliottWaveTrader.net (www.elliottwavetrader.net); a live Trading Room featuring his intraday market analysis (including S&P500, metals, oil, USD & VXX); interactive member-analyst forum; and detailed library of Elliott Wave education. Visit his website:https://www.elliottwavetrader.net. You can contact Avi at info@elliottwavetrader.net.