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Are Gold and Silver Poised for a Move Higher?


Gold and silver have been relatively quiet since the fall. A major reason for this is investor sentiment remains mixed, but recent data is suggesting that is starting to change and could propel gold and silver higher.

Recently I came across a debate that questioned what was wrong with gold since it only returned 7% in 2012, well below its decade long average.

The counter argument for gold's bullishness boiled down to comparing 2012 with 2004 since that was the last time gold underperformed its average. The logic used was something like this:

Gold underperformed in 2004, returning only 5% that year, well below its 12 year average of 17%.

But, the following years, in 2005, 2006, and 2007 it returned 18%, 23%, and 31% annually. Therefore, because gold underperformed in 2012, just like it did in 2004, it is poised to outperform in 2013, 2014, and 2015.

Reasoning such as this just goes to show you can find a statistic for anything (even the statisticians, though, would have a field day with the above flawed logic).

This is just another easy example of the confirmation bias that investors have.

Confirmation Bias

Most people have opinions and biases already and then they seek out a reason to reinforce their own pre-disposed beliefs.

It is typically much easier to find a supporting reason you are "right" than it is to ultimately change your opinion. After all, changing your opinion would require you to admit that you were "wrong."

The best example of this is the obvious polarity between cable news channels. On one side is the more liberal channel and on the other side is the more conservative one. Are there any in between? Talking points are tailored to reinforce already existing beliefs, not to try to form new ones.

In the gold (NYSEARCA:GLD) discussion above it is not hard to draw the conclusion that the wannabe statistician is likely a gold (NYSEARCA:GDX) owner and thus seeking reinforcement of his already strong beliefs that gold will rise while searching for meaningless statistics for support.

This of course is normal human behavior, but unfortunately having a bias heading into an investment is not a good strategy for success.

Removing the Bias

One of our goals is to try to see beyond the noise and biased opinions that all too often are based on ulterior motives.

We remove the bias by using data and charts which completely ignore the pundits and those with vested interests.

The sentiment story of gold (NYSEARCA:IAU) and silver (NYSEARCA:SLV) has certainly changed over the past few months.

Over the summer, precious metals were in negative territory for the year and sentiment was in the gutter.

On June 27, 2012 when gold was at $1550 an ounce, CNBC ran an article capturing the sentiment of the moment, "Is Gold on the Edge of a Violent Downturn?" At the time, it was among the many negative precious metals articles.

The mainstream media wasn't the only ones bearish as professional investors' opinions of precious metals also hit yearly lows as gold bears in a rare occurrence outnumbered bulls.
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