Nothing happened. And that was all the gold market needed.

The above sentences appear to be contradictory and senseless. But they're not; and understanding the connection between them is imperative for anyone who aims to make money in gold and keep their stress levels under control. Knowing what it means will help you invest in general, but this may be particularly important for those interested in the precious metals sector.

Gold is viewed as a safe-haven asset. When wars break out, people buy gold. When a major economic crisis hits, people flock to gold. When you're James Bond and you need to convince a bad guy that you have something valuable in your briefcase, you mention gold coins.

To put it simply: gold is particularly valuable in extreme circumstances.

This seems obvious, but once we dig into implications, things get more interesting. Since gold rallies and declines during the extreme situations, people - no surprise here - expect it to rally or decline when something extreme happens. And here's where it gets tricky. As a consequence to the above, people tend to expect that something significant needs to happen for gold to rally or decline. And that's incorrect.

When you hear a good joke, you laugh or smile. But, do you expect yourself not to laugh or smile, if you don't hear a good joke for months? Absolutely not. The reason is that there are many reasons to laugh or smile. You can see a beautiful sunset, get a promotion at work, or hear something pleasant said by your loved ones. There are more reasons for you to smile, so it's obvious that you don't need to wait for a joke and can smile whatever the reason.

The same with gold. Just because gold is likely to rally or decline based on some extreme situation, it doesn't mean that it can't rally or decline based on something else.

Stating that gold rallies or declines during extreme situations doesn't mean that it's the only time that it rallies or declines. Yet, this is what precious metals investors often focus on. And no wonder. We live in the information age, where we are bombarded with "breaking news" at least twice per day. Just look at any "economic calendar" online - it will have at least 5 events on any given day, usually more than 10. And this doesn't even count the earnings reports.

While being force-fed information through mass media, it's not surprising that investors keep looking for the "key news" or "trigger" that will make gold soar or plunge. This mechanism is being reinforced by the media themselves. After each big move in gold, they report that "gold declined on this and that" or "gold rallied on this and that". How do they know? Since there are more than 10 events planned for a given day, plus earnings reports, and plus anything unexpected (surprising political tweet, anyone?), it's very easy to come up with an explanation of gold's move that appears believable. The journalist did their job, the investors got their explanations, everyone's happy. The only problems remain that the justification provided might have really little to do with gold's move or its extent, and that people are going to - pointlessly - wait for the next big news in order to make another investment decision. This is very convenient for the media companies, because they want people to keep watching their news (and commercials).

In many cases, the description of the driver behind gold's price move may be correct, but it's relevance will be tiny compared to what investors should be really focused on.

In late March 2019, the Fed became significantly more dovish, which is theoretically a good reason for gold to rally. Of course, that was presented as the explanation behind gold's upswing that followed. What was most important was not the change in Fed's approach, or the fact that gold moved higher, but by how much it moved higher. Gold should have soared by tens of dollars and start a major rally. Instead, gold topped in the next several days and now - writing this in the second half of April - it's well below the price levels that preceded Fed's dovish surprise. This weakness in reaction is the meaningful sign, not the news or the explanation. It has profound implications, and this is something that should be discussed in the mass media... But it won't be described there, because it's easier to just focus on one of that day's economic or financial news.

So why did gold decline in the weeks following the bullish news from the Fed? We'll move to this a bit later. For now, let's focus on the fact that gold definitely didn't react as it should, based on the objectively important trigger.

If gold ignored the trigger and moved lower anyway, then perhaps triggers are not as important as it seems at the first sight? That is indeed the case.

Whatever happens in the market, the mass media will come up with a justification of the move that will look like a trigger. Remember - they want you to keep reading their news and explanations, so they have to provide them. But just because it's easy to tell that on a given day this or that might have triggered gold's rally or decline, it doesn't mean that it gives you any forecasting power. There are multiple potential triggers each day, so all that it tells you is that gold could potentially rally or decline on any given day. But this is what you already knew at the start; the above statement doesn't add any predictive value.

Again, gold doesn't have to move based on any extreme news-based triggers. It can and is likely to move based on fundamental (in the long run) and technical (in the short- and medium run) reasons. The news will cause some deviations from the main trends, but unless they really are game-changers (like World War 3 breakout), it's unlikely that they will really change anything. All moves will be accompanied by some sort of triggers and some of them might indeed be the tipping points that make gold change its trend, but they will not be the reason for the change. Consequently, knowing that a given news will be released, doesn't tell you much, if anything. In the vast majority of cases, it simply doesn't add any predictive value.

Consequently, while many investors claim that they want to know the trigger for the next move in gold... They don't. What they really want, is a forecasting tool or a set of rules to invest by in order to grow their portfolios. Many investors are hooked on financial news and think that they need to see some specific news before gold moves up or down. That's simply not true.

If not News and Triggers than What?

There are many tools to predict the gold prices, but for the sake simplicity and due to limited space, let's stick to the basics.

In real, non-market life, when you have an object that's not moving and you're not doing anything with it, it tends to stay in its place. It's so obvious that you might be wondering why we're mentioning this at all. If something is moving at a constant speed and there are no obstacles, it will continue to move at the same speed as long as nobody interrupts it. That's Newton's first law of motion, by the way.

It's extremely easy to extrapolate what's obvious in real life to the markets. But that's not how markets work. The laws that apply in physics, don't have to apply in case of the markets. Why? Because the markets are not only driven by facts - they are driven by investors' emotions. Emotions can trigger moves that are opposite of what should be taking place and they are responsible for a whole series of non-logical developments. Speculative manias, for example.

Fortunately, there's still something that we can use to estimate market's "default mode", but it's not as simple as the law of inertia.

There's another rule regarding the market that may be just as obvious as the above-mentioned physics law: markets move from being overbought to oversold and vice-versa. They tend to overshoot and undershoot to extremes. As simple as that - in the above context, it can also be understood that there is an inherent cyclicality in the market and that's what we should view as the default.

Direct consequence of market's long-term cyclicality is the fact that if nothing happens, the market will not stay in place - it will follow its cycle. Whether that will be a move up or down depends on the stage of the cycle that the market is currently in.

In case of gold and the current situation, it's been in a down cycle since the 2011 top and this is likely, because during the 2015 bottom gold wasn't hated enough and precious metals investors (here: those who either consider purchases or are already invested) were not bearish - they were eager to buy more and expected higher gold prices. This is documented by the surveys and confirmed by long-term technical signs and analogies. Therefore, since gold didn't truly bottom yet, its down cycle remains in play. So, what needs to happen for gold to move lower? Nothing. Gold is moving back and forth because new bullish fundamental developments keep popping up. But the amount of bullish news will eventually equal 0 and as soon as it does, and the market has "nothing" bullish to rally on, the price is likely to resume its default move - which is currently down. If we see bearish news, gold is likely to slide quite sharply.

After the final and scary bottom, gold's default mode will become a rally and then it's likely to trade sideways in light of bearish news - but it seems that we are still months before the start of this stage.

And all that needs to take place, for the above to happen is... That's right. Nothing.

Thank you.

Sincerely,
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager