The recent plunge in gold and silver has hurt gold bugs. The bugs have always contended that central banks and governments manipulate prices of gold and silver to support fiat currencies. It never occurred to most gold bugs that they would be hurt by the gold momo crowd.
I have to admit that my respect for gold bugs is relatively newly found. Like most people, I knew about gold bugs, but never had much interaction with them until a number of accurate calls on gold and silver started bringing a deluge of emails, mostly negative.
The hate mail started in earnest when I recommended selling all silver holdings as silver approached $50. I thought I had seen enough of it until I recommended selling half of the gold position at $1,904. At that time, the flood gates opened.
When I recommended selling the remaining half of the gold position at $1,757, for the first time, I started getting a large number of emails other than hate mail from intelligent gold bugs.
Subsequently, when I recommended short-selling gold, a totally unexpected event occurred. I started getting fan mail from gold and silver investors.
The foregoing background is important so that the readers of this article can put their arms around the point I am making.
Gold bugs and the gold momo crowd are often confused. The reality is the differences between the two groups as I have assessed from a large number of emails is stark.
Gold bugs tend to be intelligent and well-steeped in economics, especially monetary policy. They understand the arguments against gold and silver. Gold bugs tend to be long-term-oriented and disciplined investors. As an example, last year I did not see gold bugs mortgaging their homes and buying silver on margin.
The gold momo crowd is another story. Gold momo crowd buys gold and silver simply because everyone else in their social circle is buying gold and silver, they think it is going up, and they are scared of monetary policy pursued by the Federal Reserve.
The gold momo crowd keeps up the ruse that they understand inflation and history, but in reality, my experience is that unlike gold bugs, their knowledge is superficial.
At The Arora Report our computers monitor and dissect trading data on a variety of gold and silver instruments from across the world, including futures and popular ETFs such
Our computers also routinely monitor trading activity in Market Vectors Gold Miners
Coeur d’Alene Mines
Pan American Silver
I have designed algorithms that dissect the trading data along with a variety of other indicators to make a qualitative estimate of buying by the smart money and the momo crowd.
The data shows that in the run up in gold from $1,450 to $1,910, 70% of the buying was by the momo crowd. Only 7% of the buying was from the smart money. The smart money, in our parlance, means collective actions of ultra-sophisticated investors who know more, who know early, and who have more analysis power at their disposal than most of us.
In the subsequent run-up, 85% of the buying was by the momo crowd between $1,600 and $1,760. The smart money was a net seller.
In the last run-up, 92% of the buying between $1,500 and $1,790 was from the momo crowd. The smart money was again a net seller.
Here is the rub. In the latest plunge from about $1,780 to $1,540, our algorithms show that 63% of the selling is done by the smart money and only 13% of the selling is by the momo crowd. This would indicate that the momo crowd is sitting on big unrealized losses but have managed to hold on to their positions so far.
We have no good way to measure actions of gold bugs. The data from jewelry demand shows that jewelers aren’t buying much gold at these prices. Anecdotal evidence shows that some gold bugs are stepping up here to buy.
Gold and silver are oversold in the very short term. A technical bounce is in order. However, if there is another down leg after the bounce, there is a distinct possibility that the momo crowd will panic. If such panic occurs, the gold can easily plunge to $1,200.
The qualitative screen of the ZYX Change Method shows the fair value of gold in the range of $1,200 to $1,450.
The price of gold and silver is moved by the marginal buyers and sellers at the fringe. Most of my success in accurately calling gold and silver is attributable to our adaptive algorithms, i.e., algorithms that change automatically based on market conditions. However. part of the credit goes to all those investors who have written to me and enhanced my understanding of gold bugs and the momo crowd.
Any investor can develop such an understanding and use it to consistently make money in gold and silver. The rule is to buy when the momo crowd panics, to sell when the momo crowd is very pleased with themselves, and short sell when smart money begins to challenge the momo crowd.
Disclosure:Nigam Arora, his hedge fund and subscribers to The Arora Report are short gold. They are also short HL and have an arbitrage position between SLW and PAAS.
View more information: https://www.marketwatch.com/story/how-the-momo-crowd-hurt-gold-bugs-2012-05-17