7. Intolerance of Opposing Views
"I have found a crowd’s intolerance of contrary views to be its single most important identifying characteristic. This intolerance shows itself in the form of ridicule and abuse of any skeptical consideration of its theme (ibid. 56)."
One of the strongest signs of herd mentality is the fear of taking the opposite view. So far, I am yet to see strong opinions in opposition to gold – someone who puts their money where their mouth is. And when I do see someone claiming gold to be a bubble, their claims are met with heavy opposition and ridicule. This ridicule and scorn (visible in the comment sections of many anti-gold articles) are undoubtedly signs of intense bias and strong emotional ties to the gold theme; and breaking from these biases or emotions is extremely hard to do – especially when one’s money is invested in what is being argued against.
We therefore can understand why gold-bubble claims are met with heavy opposition – because those invested in gold have a high interest in continued price increases. But when the ridicule becomes so one-sided and intense, especially when it’s backed by faulty logic or extreme expectations, signs of a crowd and speculation emerge. Strong and vehement opposition to anti-gold individuals is therefore substantial proof that the gold bubble is nearing saturation.
8. Herd-like Price Targets
"In the late stages of a crowd’s life cycle, virtually all of the content will be devoted to methods for exploiting the market’s projected movements, not to explanations of why these movements should occur at all (ibid. 121)."
Gold Price Targets Range From $1,000 to $15,000: Who is Right?
Virtually no one is willing to bet against gold. Even among those who think gold is a bubble or risky investment, there are very few, if any, people actually willing to bet against it. Though it’s generally a very smart move to avoid betting against a stock or investment theme with a lot of momentum behind it, the fact that even gold bears are shying away from betting against it may signal that it is a bubble with extremely high bullish sentiment. If the gold bears are even afraid to bet against it, is there really much room left for gold to run? What happens if these gold bears finally gather the courage to start betting against it?
Moreover, if we look at the huge number of price-target estimates made by institutions, investment professionals, analysts, and the gold mining companies themselves – only 2 out of over 100 estimates are below $1400! And most of them are far beyond the price today. Such extreme bullishness should be met with severe cautious at the very least. The lack of dissenting opinion is highly unsettling.
But - I could be wrong. At least that's what almost every analyst, bank, mining company, investor,and financial institution thinks. Gold price targets for 2011 range from anywhere near $1000 to as high as $15,000. The larger financial institutions are clustered near $1,500 though. And considering Gold is currently selling at around $1430, does it really pay to take on the potentially large risk when consensus estimates are only about $70 away? If you do think it is worth it, youshould hope some of the individuals predicting$2,000 or $15,000 goldare right.
Here is a comprehensive and exhaustive list of Gold price projections:
Higher than $10,000
$5,000 – $10,000
8. David Petch; $6,000 – $10,000;
Up to $5,000
< $3,000 – $4,000
$2,500 – $3,000
1. Emerging Market Troubles
One of the major drivers of the markets over the past two years has been the "unstoppable" and highly promising future of the emerging markets -- especially China. As millions of inhabitants in emerging countries begin to enter the "modern" world and middle class, their consumption and their effect on the economies of countries all over the globe increases. And as millions of people contribute to the growth of China, India, and other countries, they will require extra food, energy sources such as gasoline and oil, cotton for their increased consumption and clothing needs, industrial metals for their new cars and technology, and many other materials that a growing and evolving population needs.
The problem that may emerge, however, is that there is no guarantee that China and other emerging countries will actually meet our lofty expectations. Emerging markets have been growing at such a rapid pace (7-10+ percent compared to 2-3 percent for the U.S.) that their development may actually be setting them up for housing bubbles, high inflation, and uncontrollable growth.
The problem -- and it's a major one -- with this emerging markets theme that has dominated for the past two years is that all the expectations and projections investors have had may be way too optimistic. With China and others showing very troubling weakness and attempting to slow their growth in order to prevent economic turmoil, a huge economic dip is not out of the question. Add to that the possibility that all the growth is already factored into the commodity and stock prices (that investors have speculated tremendously in all EEM-related themes and that the current prices reflect future expectations), and any stumble or slower growth could send prices plummeting as they attempt to adjust to more realistic growth.
Here is the possible scenario that derails economic recovery and hurts emerging markets investors:
- Emerging markets have been set up with lofty expectations for growth that will not be achieved due to unsustainable commodity and food prices, as well as unsustainable growth rates.
- The double-digit growth rates that many investors have been relying on do not actually materialize. More reasonable growth rates of 5-8 percent do.
- Since prices have run up at such massive rates and steep angles, they must come back down to reflect the more reasonable growth rates that have surfaced.
- Prices for emerging markets, commodities, food, and energy drop considerably in order to better reflect current conditions and revised future expectations.
If emerging markets continue to show weakness, commodity prices could suffer. And if commodity prices suffer, gold will most likely drop as well.
2. Monetary Tightening/Interest and Margin Rate Risks
If emerging countries and others begin tightening what has been very loose monetary policy since the recession, commodity prices may suffer. With high and unsustainable inflation emerging in many countries – from China to the UK – increasing interest rates or margins in order to combat these threats could put a sharp stop to gold and commodity prices. Furthermore, though it may be far off, U.S. tightening could put a big damper on further price increases.
3. Inflation or Deflation?
Investors have bought gold out of fear of both inflation and deflation – one of the two must be wrong.
4. Market Up Means Gold Down
I am not yet convinced that the market will continue its uptrend and recovery. But those gold lovers out there must keep in mind that much of gold’s run has been due to the uncertainty and the continued threat of a renewed recession or global turmoil. If the market continues to rise and the economy continues to improve, many investors will move back into stocks instead of gold; much of the incentive to invest in gold will no longer exist. According to this argument, only a market decline should justify buying gold. On the other hand, rapid inflation could justify rising gold prices too. It appears that gold will benefit only from a renewed recession or rapid inflation; anything in the middle supports gold’s decline. A recession or inflation isn’t out of the picture though.
5. Gold Price and Gold Miners Lagging
Gold has set new highs in U.S. dollar terms, but is lagging both in terms of other currencies and in the share price of gold miners.
According to Kitco's index, Gold is yet to make new highs in unanimous fashion; it is still lagging in terms of other currencies. And unless it can break out to new levels in a decisive way, we may currently be approaching the next phase down.
While gold has recovered all of its losses and even broken out to new highs (at least in U.S. dollar terms), the miners have failed to do so, and have even dipped for the second time since attempting the recovery.
6. Still a Safe Haven?
Gold is even starting to show weakness as a "safe-haven" play, as prices have not responded well to the Middle East and Japan turmoil.Though gold and silver are expected to gain if the market drops, as investors flee to safety, we're not so sure if these precious metals are truly as "safe" as many believe them to be. If gold and silver have become speculative trades, as we think they have, they may drop together with the rest of the market (as did oil in 2008, when everyone believed it would continue to soar).
For all the reasons above, we think the risks involved in gold are too great to warrant investing in it. Not only have we seen soaring prices, media frenzy, overly enthusiastic investors, extreme speculation, and what appears to be an overly-saturated investment theme; we are now seeing weakness, as gold has underperformed silver and many commodities over the past few months and has even lost some of its strength as a "safe-haven" play during the Middle East and Japan turmoil. Furthermore, we think there are other investment opportunities that provide better value and further upside for much less risk (diamond-related plays or natural gas, for example).
We continue to hold the opinion that gold looks extremely dangerous at these levels, against what seems to be the entire investing world. With so many clues pointing to the near-definite gold bubble, accompanied by extremely optimistic investor sentiment generally seen in previous bubbles, we are short gold mining companies and awaiting further confirmation to pile on the short-gold trade.
"When everyone thinks alike, everyone is likely to be wrong" – Neill (1954)
Sometimes it pays to go against the crowd.
Disclosure: I am short GDX.