Headline Sentiment

A random selection of article headlines about gold I see this morning:

• Is Gold Getting Ready to Bounce?
• Why Commodities May Be Nearing a Turning Point
• Jon Nadler Proves Precious Metals Manipulation
• Precious Metals Manipulation: Lawyers Prepare for Battle
• Negative Real Rates of Return Should Force Investors into Precious Metals
• Gold: Down Short/Medium Term; Higher Long Term?
• South Africa gold production falls 10 percent
• Arabian investors snap up bargain gold and silver

There's lots more of the same, especially when you are willing to dig below the higher-rated blogs and news services. You don't need to read any of these articles to learn something important (I read only one of them).

When any stock or sector suffers a rapid decline (there lots of those right now) armies of rationalizers materialize seemingly out of nowhere. They argue vehemently against the decline and pounce on any rumour of manipulation, ignorant speculators (never themselves!), supply problems or unheralded demand to argue that the decline is unjustified and the turn is coming soon. Real soon.

The message I see is that those still in the declining stock or sector are in denial. Yes, they may be right eventually, but for now they are wrong. So what will they do if the decline continues, for whatever reason? Eventually they will sell, get taken out on margin, or perhaps simply get very quiet as they cuddle their worthless paper assets. This means that right now there is more fuel to drive the decline further.

The same thing happens with rising stocks and sectors, except then it's those on the short side that raise the biggest fuss. You don't have to look far to find examples; energy was a good one as oil rose to $140 and natural gas to $13.

If you are holding, or even looking to get in at the 'bottom', in any equity when the rationalizers are at their loudest, you should rethink your inclination. It doesn't mean it would be wrong to invest there, it just means you need to look past the noise to see if you have a sold, evidence-based reason to be there. That reason can be based on fundamentals or technicals. Also, ensure you have a contingency plan such as a rigid stop loss in case you get it wrong.