History is not linear. Financial history doubly so. Investors should beware of thinking they know what will happen next.
It’s precisely because I don’t know—and I don’t think anyone knows—what will happen next that I’m massing as much cash as I can.
Of course, we do well to look to history for guidance. As the saying goes, those who ignore history are doomed to repeat it.
But history itself tells us what I’m saying. Things can seem to be headed in a straight line in a certain direction—then something changes and suddenly history takes off in a completely different direction.
This can happen because of a black-swan shock like COVID-19. It can also result from an idea whose time has come, without any visible cause.
I bring this up because several readers have written in to say that they’re concerned about gold dropping down to $1,000 or less, based on some persuasive technical analysis they’ve seen.
I don’t want to get in a verbal battle with my technical friends, but I do want to remind them that, as above, patterns work… until they don’t. Patterns in charts can tell us what might happen if things go as they did in the past. They can’t help us—and can actively mislead us—if things don’t go as they did in the past.
Patterns and trends on charts are not like railroads that take a train in a fixed direction. They’re more like trails across the desert. It’s easy to leave them and go a different direction at the slightest whim. And even trains on the most solid rails sometimes go off the tracks.
I think this is a particularly dangerous time to rely heavily on patterns from the past.
What is happening today in the financial world is has never happened before.
Sure, there are similarities to the Crash of 2008. I’ve pointed those out myself. But what’s been done in two weeks in the US is already more than what was done in two years back then—and it’s just the beginning. And the world wasn’t awash in negative interest rates before the downturn back then. And entire countries didn’t shut down their entire economies back then. And… and… and…
We are truly in uncharted financial waters.
That doesn’t mean we throw out all our charts. But it does mean that we need to be very, very careful about thinking we know what will happen if things go as they did in the past.
Shutting down the global economy like this has never been done before, so the consequences can’t all be known in advance.
Now, back to this prediction of a 40% or 50% retreat in the price of gold.
I won’t tell you it can’t happen. Anything possible can happen—by definition.
But I don’t think it’s likely, and here’s why:
- The liquidity crunch last month will have investors—especially institutional investors—more wary about going out too far on margin. A lot of the excessive leverage that took Wall Street to all-time highs just before the crash has been unwound. This should put gold under less pressure if markets melt down again in the near future. I do expect such a meltdown, but I also accept the possibility that massive government intervention may prevent it.
- Government response came after some delay in 2008. This time, the Fed went to zero before the crash, and Congress followed up quickly. The tsunami of easy money that’s already been created is clearly inflationary, especially for financial assets, including gold and silver. We haven’t even spent the first $6 trillion authorized, and Congress is already busy adding more trillions. Even mainstream analysts can see this reality. More and more are including it in their outlooks, which do influence gold traders.
It’s not my intention to predict the future while criticizing others for doing so.
That said, my impression is that the harm being done is much worse than most investors realize. This is why my main theme today is “go to cash, wait for the smash.”
But I don’t tell anyone I know what will be.
What I do say is that going to cash gives us the flexibility to buy in at stupid-cheap prices if I’m right about more meltdown ahead, or jump on the bandwagon once it’s clear the bottom is behind us.
That’s not a prediction; it’s a tactical stance that minimizes risk and maximizes flexibility in the face of the unknown.
And that’s my take,
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