"No warning can save people determined to grow suddently rich" - Lord Overstone

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Gold and The Public's Complacency

We can all give many reasons why the gold price should be substantially higher. But reality trumps our reasoning, along with our wishes and desires. This is no more evident than in today's market for the precious yellow metal.

Numerous conditions exist that normally act to drive gold higher in price. The world's banking system hasn't fully recovered from the 2008 melt-down. Greece, Italy, Portugal, Spain and other countries are teetering near the edge of a debt default. If a major bank or government defaults couldn't it snowball and create a global financial collapse even worse than before? Further, monetary creation has exploded world-wide threatening massive inflation! Shouldn't these and other reasons be converging to sufficiently frighten people into taking action and buying gold? But they're not! So we must ask why?

Don't get me wrong. Unless this time is truly different gold will mark its final low and rise from the ashes. But, as it is always in markets, the question is one of timing. More importantly, how can we protect ourselves, and prepare for that time?

I have followed gold and gold equities on a daily basis since the mid-1960's. Since then, each major gold and gold stock Bear Market low was accompanied by a few similar conditions. First, the HUI after having a greater percentage fall than gold, struck its nadir and began rising while gold further weakened. Later, after gold marked its final low point and reconnected with the HUI, they jointly registered increasingly higher prices. Also, most gold bulls after suffering severe losses had either thrown in the towel and sold their positions, or wished they had. Further, the mood among gold's loyal champions was one of confusion, depression and even betrayal. The cloud hanging over the eternal metal's believers was indeed dark!

To my mind none of these conditions fully exist today. First, the HUI has been working sideways for several months. Until it impressively surpasses140 there is no legitimate reason to believe its decline has ended. For gold, it's weak advance to date gives no indication other than wishful thinking, that it has truly reversed its bear trend. Finally, there remains abundant hope where many believe the worst for gold is over or is nearly so. The usual misery, despair, disgust and comments like, "I'll never look at or buy gold again" are all missing. Despite the fact that they've suffered substantial losses I believe there are still too many people hanging on, for gold to have hit its ultimate low point.

It recently struck me that there are two missing but necessary ingredients required to reverse gold's downward course. The first is "need". Presently, few really believe they need gold for protection! Further, there is nothing on the horizon that will soon change this state other than a surprise event or an advance resulting from an oversold or other technical condition. And, if either occurs, it may only result in an impressive rally, before the decline resumes its damaging path and takes gold to new lows.

Gold is coveted and needed most when people are afraid. The fear of a government or its collapse, the loss of the purchasing power of a country's money, or fear of a banking system failure are all reasons why citizens run to the safety of gold. However at present these fears are being held at bay, or have been papered over.

The U.S. banking system could have collapsed in 2008. But our citizens' concerns were assuaged by consoling words from the Fed and our government. Greece, Italy, Spain and any of a host of other nations are struggling and may default on their debt. With each threat either the IMF, the European Union or its central bank have stepped in to quell the situation.

Even today there are important global banks that are not truly solvent and may ultimately fail. Further, the unprecedented creation of trillions of U.S. dollars or their equivalent in yen, euros, yuan and British pounds could unleash massive inflation. But there is no talk of either by the press to concern the world's population. With these potential threats and others, why are the overwhelming majority of individuals unconcerned? I believe that while all of these worries and fears exist in most minds, they don't pose an immediate threat. One by one each of these perils has been temporarily neutralized. They remain in the background and are not impending dangers, so most people won't act upon them. In a word, these nullifying actions have made people complacent. And until the complacency is broken, the need for gold by most citizens will remain subdued, if not absent.

Markets move in anticipation of events, and gold's is no different. I believe there are two possible scenarios that will act to end gold's decline. First, when the most forward observers and thinkers begin to cautiously accumulate gold. This, after sensing the U.S. and other major economies have begun sustainable economic expansions. Or, deflation takes hold and the important countries sufficiently expand their QE programs to threaten rampant inflation. While neither exists today, let's hope it's the former that prevails!

 

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