Gold And Silver Enthusiasm Soar To Historic Levels In The Wake Of Collapsing Prices

| About: SPDR Gold (GLD)

On April 14th, I wrote my reasons for believing that a bottom for gold would prove elusive. At the time, I was thinking gold (NYSEARCA:GLD) could experience a new extended phase of weakness. I definitely did not anticipate a collapse in prices on the very next trading day (April 15th).

The collapse in GLD


I have enjoyed reading some of the articles on gold since then. Some of the best on Seeking Alpha have been "This Gold Slam Is A Massive Wealth Transfer From Our Pockets To The Banks" -- which provided the evidence of market manipulation/speculation that drove gold prices to a collapse -- and "Gold Buying Surges On Price Correction", which lists all the sources of buying that have rushed in to take advantage of the cheaper prices. All together, it seems the weakness I anticipated in gold essentially got compressed into one day.

Adding to the case for a bottom (or "close enough" to one) is the surge in my stylized "Gold Enthusiasm Index." According to Google Trends, on April 16th (the day after the price collapse), the web search term "buy gold" equaled the all-time set in August, 2011 -- 100 provides a normalized value for the highest volume of searches. The charts below show the first 30 days to make the spike clear and the series since 2007 for some perspective (although the spike to 100 last week is cut off).

A new Google Trends high for "buy gold"

A new Google Trend high for "buy gold"

Source: Google Trends

This surge was definitely strong enough to send my stylized Gold Enthusiasm index -- the Google Trend Index for "buy gold" divided by the price of GLD (times 100) -- surging as well.

Gold enthusiasm suddenly wakes up

A spike of near-equivalent magnitude occurred March 21, 2008 in the wake of the Bear Stearns collapse. This spike far eclipses the one the occurred right around the last peak in gold prices in 2011. This period, unlike those two periods, the Google Trends index for "sell gold" did not spike along with "buy gold." This dynamic is similar to what occurred when gold made a major low October 2008. So if history repeats itself, it is very possible that Google Trends has provided yet one more indicator that gold has reached (or is reaching) a major low. For the future, I will have to incorporate "sell gold" in the Gold Enthusiasm Index to reflect how its movement informs the true level of enthusiasm -- probably as simple as taking a ratio of the two indices. I will wait to see what happens in the coming weeks, and maybe months, before making any adjustments.

Perhaps one interesting and confirming twist is the Google Trend view on silver (NYSEARCA:SLV) search terms. It turns out that "buy silver" and "sell silver" follow similar patterns to gold. "Buy silver" reached an index high on the same day that silver prices collapsed (April 15th). "Sell silver" remained as flat as ever.

Interest in "buy silver" reaches a Google Trends high

Source: Google Trends

The history since 2004 tells a similar tale. Silver's major low in October 2008 was accompanied by a historic (at the time) spike in interest in "buy silver" but not "sell silver." When this happened again in December 2010, silver was in the middle of a major breakout that continued until BOTH "buy silver" and "sell silver" experienced spikes of interest in April 2011.

Interest in silver searches since 2004 shows a familiar pattern...

Source: Google Trends

Finally, here is a weekly chart of iShares Silver Trust that shows the recent breakdown relative to silver's previous support and previous breakout.

SLV's breakdown has now erased 90% of the gains from 2010 breakout


{For skeptics of these methods: any lingering doubts I may have harbored about the potential of correlating Google search trends with real-world dynamics was erased when I saw a talk by Hal Varian, Google's Chief Economist, at the 2012 conference on Business Analytics and Operations Research hosted by The Institute for Operations Research and the Management Sciences (INFORMS). During that talk, Varian powerfully showed how to use search trends to predict U.S. GDP. You can also check out his primer called "Predicting the Present" posted on Google's Think Insights.}

As I indicated in my last piece, I am a buyer on gold (and silver), including miners, on major weakness. After last Monday's purchases, I still kept plenty of powder dry to enable further purchases on further weakness. However, it seems now those additional opportunities may not come. As always, time will tell.

In the meantime, I will continue to be amazed by the amount of chatter suggesting that gold's collapse is a harbinger of deflation. An example was a recent Marketwatch article that concluded that the small sell-off in Treasury Inflation-Protected Securities (OTC:TIPS) indicated a desire for investors to dump hedges for inflation. When gold was surging, few commentators sitting on the outside seemed to believe it was a true harbinger of inflation. Regardless, the irony of a real deflationary threat is that it will cause central banks around the globe to proactively fight even harder to generate higher levels of inflation. The ride may be bumpy, but from my perspective, all roads still lead to currency debasement. Perhaps inflation will become a palpable threat once after enough people finally conclude the global economy will never see real inflation again…

Disclosure: I am long GLD, SLV, GG, PAAS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.