The natural reaction for most investors is to buy an asset when it goes down on good news. On the surface, this sounds logical. But when you consider what the market is telling you, it is often quite detrimental to get long when a market doesn't respond well to bullish news.
Yet that's exactly what a lot of very loud, very bullish gold (GLD) traders are doing. When gold ignores such factors as
- the U.S. deficit;
- open-ended QE (money printing, as they say);
- weakness in stocks (SPY), particularly international stocks (VEU);
- rising bond yields in Spain and Italy;
- a VIX (VXX) that's up more than 50% from the lows;
and continues to roll over, it's telling you that support has yet to be found. The most glaring example of gold not responding well to bullish news was the failure to break out above that key $1,800 level in the fall of 2012:
Click to enlarge images.
The price action was screaming that gold was exhausted; the inability to break out above key resistance on what was expected to be ultra-bullish news suggested that you should be short. But this kind of analysis is inconvenient for anyone with a bias. Instead, many continued to argue that the failure to move higher was simply a misunderstanding of sorts (or even manipulation!), as if this market, dominated by sophisticated institutional traders with tons of data, just wasn't up to speed with how much inflation this policy was going to cause.
Markets may not always be efficient, but price action doesn't lie. In a market like gold, where the only thing that matters is price action, you just had to get short. And so I did.
Gold Refuses to Sustain Upward Momentum
Today, in what some still consider the "bull market" in gold, the precious metal can't sustain rallies on news that used to send it up 1% in minutes. Stocks off 5% from their highs, with emerging markets tanking? Nope. The VIX was up more than 10% on Tuesday. Remember when moves like that used to spillover into the gold market? Not anymore.
The U.S. deficit may be shrinking, but it's still "unsustainable," or so many gold investors think. That hasn't mattered since mid-2011 since gold peaked -- when will it matter? And if gold can't go up on open-ended QE and large-scale MBS buying, what happens when the Fed announces it's actually going to start reducing its purchases? What happens when real rates start to become meaningful again?
Despite a 1% decline in the S&P on Tuesday, another beating in emerging market equities, and a near 1% decline in the dollar index fund (UUP) -- an uncommonly large move for the ETF -- gold still rolled over and lost its channel support.
What other info do you need? Continue to short the heck out of gold.