posted @ZeroHedge
Bull markets are extraordinary opportunities for wealth creation. There is something unquantifiable about the persistence of price as it moves higher. How to define a bull market is another question, but however it is done, we can agree that something different has occurred to create the dynamics that seem to persist in a bull market.
As many readers are aware, I monitor investor sentiment across a variety of markets. I do this not so much as to be a contrarian, but to determine those points where there are changes in trends. You see, it is in the extremes of price where changes in trends occur. A good example that everyone is familiar with is the overbought market. Typically, in an overbought market, we would expect too many bulls because as prices rise so does investor optimism.
Because a market is overbought, it is reasonable to expect a correction in price. Every now and then, the market doesn't correct and overbought becomes more overbought. The "normal" cycle of overbought leading to oversold and back to overbought is broken as prices just trade higher. It is in these instances that new trends are born. The market doesn't behave in a way that one expects leading to a new trend.
So what does this have to do with the bull market in gold? See figure 1 a weekly chart of gold (cash data). The indicator in the lower panel is the MarketVane Bullish Consensus for gold, which is a measure of investor sentiment. When the value is high, there are too many bulls and when the value is low, there are too many bears. This chart goes back to 1997.
Figure 1. Gold/ weekly
The portion of the indicator contained within the yellow rectangle was prior to the bull market in gold, which started in 2001. We can see that extremes in the MarketVane Bullish Consensus identified extremes in gold fairly well such that those extremes were associated with corrections in price.
Then came 2001, and something happened in the gold market. Whatever that something was is debatable, but whatever it was, it was the start of the gold bull market. Old rules of looking at gold no longer applied. Prior extremes in the MarketVane Bullish Consensus, where gold typically reversed, no longer held true. Failure of price to reverse lower at old extremes resulted in new price dynamics, never before seen MarketVane indicator values, and the gold bull market. This can be seen by the blue arrows on the chart.
Since 2001, the MarketVane Bullish Consensus has been in a new range as defined by the gray rectangle, and the recent sell off in gold has done nothing to change that range. In fact, with sentiment at the bottom of the range, this should be considered a buying opportunity for gold on the order of 2003, 2006, and 2008. And until the gold market does something different, there is no reason to think otherwise.
