The person who lives by hope will die by despair.

Italian Proverb

Over the years we have frequently stated that every that every major bull market will experience at least one back breaking correction. Usually the correction culminates with a 50% pullback from the highs. In the case of Gold, this would equate to a pullback to $960.  The precious metal’s sector had a splendid lope that began in 2003 and ended with spectacular dash in 2011. To think that the Gold bull would continue unabated would be to put it mildly wishful thinking.  Sadly, many Gold bugs opted for this line of thought, rather than dealing with reality; the reality being that it was time for the entire sector to let out some steam.   

Gold bugs have a dangerous knack for losing contact with reality and embracing the illusory. When Gold topped out in 2011 and started to correct, they started to recite “the buy on the dip” mantra. When it appeared to have put in a bottom in the middle of 2012, they became Euphoric and start to hum “death to the dollar”. However, this euphoria should have faded when Gold refused to trade to new highs, and instead put in a series of lower highs (look at chart below).  A series of lower highs, after a very long run, is usually a negative omen.  The Gold bugs were however unfazed and continued to sing “Kumbaya”, but alas no one was listening and the correction gathered steam.  

Click on picture to enlarge

We are using the ETF, GLD for illustrative purposes; it mimics the price of Gold fairly well.  Note when a market is in a bullish phase, it does not put in a series of lower highs; this is a signal of exhaustion.  This occurred twice over the past 10 years; the first incidence lasted from 2008 to 2009 and resulted in gold shedding 30% of its gains. The second time, the topping formation was much wider and gold from high to its current low hashed roughly 43%.  History has a tendency to repeat and the repeat pattern  (on a much wider scale) from 2008-2009, served notice to the astute investor that all was not well, and that it was time to bank some of those profits.  We noticed these signals and the many negative divergences that our indicators were generating and advised our subscribers to close the majority of their precious metal positions in 2011.

From approximately Feb of 2013 to March of 2015, the Gold bugs discovered religion, and started to pray for a turnaround.  When you find religion in an area that does not merit it, the result is always calamitous. The Gold camp was in turmoil, and chaos became the order of the day; how could Gold drop when the Fed was creating money at an insane pace?  Unable to explain these strange phenomena, they opted for the illusory; magical incantations, looking at tea leaves, skull bones, etc., etc.  Based on this strange behaviour, it was obvious that Gold would continue to trend lower; an assessment with which Jim Rogers seemed to concur.

 “There are still too many mystics in the gold market who think gold is holy so cannot decline. When/if they give up and throw their gold out the window because ‘she lied to me,’ gold will make a firm bottom,” Rogers said.

To add pain to misery, Gold traded below $1100 briefly, and religion was abandoned, in favour of fear and desperation.   Hopelessness is setting in, for the Gold bugs cannot fathom how against the backdrop of trillions of new dollars being added to the money supply, Gold continues to take a beating.