Investor psychology remains at least as important to an asset price as the fundamentals underlying the asset. As the “dot com” bubble of the late 1990’s and the housing bubble of last decade reminded us, psychology occasionally controls asset price. Gold as an investment has clearly rebounded from its morose lows of the early 2000’s. However, the precious metal has not yet reached anywhere near the mania, and hence the lofty prices, of those two bubbles. Yes, gold’s fundamentals continue to be bullish. The reason gold hasn’t yet topped is psychology.
I don’t need a commissioned and notarized study to know that the psychology related to gold remains dormant. I maintain an informal small circle of investment buddies who like to think outside the box. We often exchange investment ideas and experiences. Sometimes other people overhear us. Twice in the past year I’ve been told by “passive” investors that we’re crazy about both inflation in the USA and the price of gold in dollars skyrocketing. By “passive”, I mean an investor who makes an investment decision, say in a 401k plan, once every few years and does little else except note the balance once every 3 months when he or she opens the quarterly statement. Passive investors think little and monitor nothing.
I have read Robert Prechter’s work over the years. I don’t pay attention to his market predictions. Those don’t contain his brilliance. I study his ideas on investor psychology. For example, he emphasizes that investor psychology reveals itself in the popular media. In the past month, I have seen “cash for gold” dealers both on television and the local mall. So what does that tell you? What does it mean when insiders using mass media and mass retail are actively buying average people’s gold for paper dollars? Who in these transactions has figured out what’s a good deal? Don’t be average.
The only sell-side gold bullion retailing I’ve heard about in this country is advertisements during conservative talk radio. That audience is rather small compared to TV. Also, many talk radio listeners are receptive to buying gold for the wrong reason. I doubt I would hear many such advertisements if those currently in charge at the national level were the “conservative” brand. To be equally critical of liberals, since gold represents less control by a big brother government over its subjects, you won’t hear or see gold related investments by left leaning media under any administration. The bottom line is that partisanship makes your investment portfolio an accident waiting to happen. My buddies and I gladly will take the opposite side of any of your politically motivated investment trades.
I leave quantifying investor sentiment to the technicians and other professionals who have more time than I do. If you need more data, studies, and analysis to convince you that gold’s greatest gains lay ahead, you will miss the investment opportunity because (1) you haven’t done or don’t want to do your homework, or (2) you wait for the herd to stampede before you move. To make the biggest gains in investing, you need situational awareness. Like I tell my teenage kids often, what you’re looking for is right in front of you. You just don’t notice what’s in plain sight.
The big move up of this secular bull market in gold is yet to come. Since the majority of voters want something for nothing, the politicians will coordinate with the Federal Reserve to pay for deficits and pay debt by electronically printing money. The path of least resistance is inflation. The psychology of gold, as it does with any other asset, will lag the fundamentals. The “passive investors” I mentioned will stampede when mass media and retail start selling gold to them rather than buying from them. Such panic will cause dangerous price spikes. In the future, I’ll take notice when newly minted gold “buddies” tell me that they’ve finally bought gold bullion from a kiosk at the mall. Then I’ll start worrying about deflation.
©2010 by Chuck DiFalco.
