You Are Being Misled By Common Assumptions About Gold

Thursday, March 17, 2016
gold bullion
WARNING: If you want to reinforce only that which you already believe, then most of the other article writers out there will suit you better.  If you want to hear the truth, then let’s get started.
 
Over the years, we have heard many assumptions made by gold investors which are often wrong.  However, because they have been accepted by the masses as truth, they are often repeated by the media and other analysts, without engaging in any critical thought regarding their accuracy, thereby perpetuating fallacies.  
 
Independent thinking seems to have become a long-forgotten attribute among individual investors, as most simply accept as gospel whatever they hear on television or read in articles.  But, I urge all reading this article to consider my advice very carefully on this matter: please begin to think for yourself or you will simply find yourself as part of the larger herd.  Has following the “common-think” for the last four  years helped or hurt you? 
 
When I provide my analysis, I always attempt to provide you as objective a perspective as I possibly can.  I always challenge the common perspectives in the market, since I know that the majority of the market is always wrong at major turns. I never buy into “market think,” and am always in search of the intellectually honest perspective, which will ultimately lead investors down the profitable path.  To this end, I believe I have been successful, and the investment accounts of those who follow me seem to support this.

Common Assumptions

Over the years, we have heard about many assumptions that have led investors astray.  We have heard that buying by governments like China, India, and Russia are bullish for gold, yet gold continued lower and lower, as we correctly believed it would, despite the contrary common-thought.  We have heard that quantitative easing was going to cause the metals to skyrocket, yet, the exact opposite has occurred, for which we prepared those who would listen.
 
But, one of the biggest fallacies is that gold is a safe haven against equity market volatility.  I know this is one of the most common assumptions accepted by the market.  I know that I have seen recent articles on this issue alone.  I know I have seen many commercials by sellers of gold that have scared people into buying gold as protection from impending stock market doom.  And, they are all completely wrong.
 
Now, don’t get me wrong.  I am a huge metals bull.  But, I buy metals because I see the potential for a multi-decade bull market about to take hold, not because I see a massive stock market collapse.  And, I don’t try to engage investors' fears in order to convince them to buy gold, because, believe it or not, I expect for us to enter a period of time around the corner where the equity markets and metals will rally together.  Yes, you heard me right.

The Truth

I have not seen a single person note this fact, but since early February, the metals and the miners have been rallying WITH the equity markets.  And, this is not the first time this has occurred, nor will it be the last.  I believe we will see this potential seeming correlation eventually being recognized within our markets, but it will last for only a few years.
 
So, allow me to show you why only expecting an inverse correlation between equities and metals is just outright wrong.
 
Let's take a look at the 2007-2009 time frame, which evidenced the most significant period of market volatility since the Great Depression and see if we can glean anything from the metals' action - and if they are the safe haven everyone is selling you on.
 
We all know that the S&P500 topped in October of 2007 and, consequently, began an estimated 300-point decline into March of 2008. Subsequently, we saw a corrective bounce in the equities for a couple of months, before it continued to head down. During that same period of time, even while the markets were heading lower, the metals continued to rally strongly. Here we have evidence of precious metals supposedly rising during a period of market volatility. 
 
But when we then look toward the May 2008-March 2009 decline in the equity market, we have clear evidence that the metals also experienced significant declines within that time period. In fact, gold lost a little more than 30%. So, here we have a period of time where the metals were moving in the same direction as the equity markets, and clearly not acting like a supposed safe haven. But gold also found a bottom - and then began to rally four months before the equity markets, after which time, they began to rally together again for two years. 
 
So, when one is presented with these facts, does it make sense that the metals are surely going to rise during periods of market volatility? Are metals really the safe haven everyone believes they are during down markets?  Are these markets inversely correlated, as so many claim?
 
If you need further evidence, consider this additional fact.  Back in 2008, the folks at Elliott Wave International published a study that showed that in 10 out of 11 recessionary periods since 1945, gold experienced a negative total return.  
 
And, if one simply looks back to the period of time from 2003-2008, did the metals market not rally along with the equity markets?
 
So, when one is presented with these facts, can you really believe that metals are the safe haven everyone claims they are during down markets?   Can one also come to the conclusion that these two markets trade inversely with each other? 
 
Again, when one actually looks at the facts, rather than the supposition, fallacy, and fear being sold by most of the article writers out there, it tells you to ignore much of what is presented about this market and begin to think for yourself. 
 
Much of what you have been fed about this market is simply wrong. And until you are able to look objectively at the market, you will likely see long periods of time where you are on the wrong side of the market purely because you bought into these suppositions, fallacies, and fear.  Or, did we all forget the pain of 2011-2015 already?

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.