Your weekly updates comment on the consistency of human nature as the foundation for your analysis. Yet, human nature is precisely the engine that is now pushing gold to behave in a manner quite outside the patterns that defined previous years. Isn't it logical to assume that the patterns of old will yield to human nature's reaction to a new world financial context? A context founded in fear, uncertainty and doubt? Perhaps expecting corrections to behave as they always have in the past no longer makes sense as human nature reacts to a financial world gone mad?
This is a very interesting question. Please note that peoples' behavior (their actions) and the way they behave under various circumstances (their nature) are two different things. Compare that to the difference between driving a car (action) and being a good driver (nature) or - in quantitative terms - to the difference between the x variable and the whole function translating x's into y's. While certain factors: unsustainable increase in money supply, rise of the Asian Economies, etc. - will influence peoples' actions in one way or another, they will not change the very basic, fundamental concepts of fear and greed (you may prefer to interpret the latter as "need of financial safety"), which are the ultimate forces driving markets in the short run.
At this point this commentary might start to sound more philosophical than market-related, but nonetheless, we would like to follow with this thought.
It was Heraclitus who said that "there is nothing permanent except change". I must admit I really like this quote, because it appears pure nonsense at first only to become obvious after a few moments. Everything in life changes - day turns into night, rain turns into sunshine, market rallies turn into declines and so on.
However, if one takes one step back and takes a look at virtually anything from a broader perspective, one sees that eventually everything starts over again (not always in precisely the same way) - night turns into day, sunshine turns into rain, and market declines turn into rallies. Given the consistency of change one might indeed see it as a constant – while neither day nor night are constant, the fact that we have day after night and night after day is.
Markets change in more complex ways than is the case of day and night, but that does not make the above conclusion useless - we just need to take a few steps back to see the whole picture. With enough "steps back" we can see decades of market data. Within that long period we see several new ideas about the economy, currency devaluation, high interest rates, low interest rates, inflation, deflation, disinflation, and wars - in sum, many factors causing excessive greed or excessive fear. Has the financial world gone mad now? If so, this isn't the first time that it has happened and it most probably won't be the last. We still see bull markets that consist of three stages that are divided into smaller up- and downswings. We still have declines and upswings taking place with regard to the 1.618 Phi number and so on.
In this way things simultaneously change (various stages of a bull market, up- or downswings of different size) and stay the same (a bull market is followed by a bear market just like a day rises after the night).
The point is that if gold moves above its previous trends it will not be something "new" and thus rendering previous observations useless. If gold establishes a new trend and verifies it, we will be able to apply other techniques, moving averages, ratios etc. - but until that happens we need to stay with the proven methodology. We believe that most people would not want to switch from a reliable, comfortable and economic car to a new prototype until the latter has passed appropriate tests - and we see analogies in the way we approach the market.
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