15 January 2014

Use narratives, not just charts, to tell if gold's bottom may be near

To determine if gold may be bottoming, I think Ben Hunt's game theory approach to investment decisions is a useful framework to use. First, a quick summary of Ben's theory, mashing up his words from this article:

"Game theory is a methodology for understanding strategic decision making within informational constraints where each player’s decisions are made in the context of expectations regarding the other player’s decision-making process. In other words, playing the player, not the cards.

The secret of effective market game-playing is to recognize that the market game hinges on the Narrative, which is a set of public statements made by influential people about the market. These statements create Common Knowledge - what everyone knows that everyone knows."

Goldbugs have their own narratives to explain gold price movements but as I discussed in this post, what matters is the narrative that mainstream investors are hearing as that is what is driving their investment decisions and money flow (in or out of gold).

Over the past year the mainstream narrative has been that "gold is in a bear market and shows no sign of ending". The focus for this narrative was the reduction in ETF balances, with each subsequent redemption validating the thesis, acting as a negative feedback loop. On top of that you had the idea that the US economy was turning around and the associated taper talk.

For example, see this Gulf News article where it says that gold buyers (my bolding) "were put off by gold price’s sharp decline and did not want to be seen buying when there was every chance that it could drop further" or analysts falling over themselves to forecast a lower gold price bottom than the last forecast.

Recently, however, I've noticed the emergence of a different narrative, one that asks whether gold's bottom may be near. See these recent examples:

Now this narrative is not bullish and more cautious but that in itself is significant because it is the precursor to more bullish narratives. It also gives confidence to smart money to start to get into the market, as we can see from that Gulf News article where it notes that "with gold prices seeming to have settled in at the $1,200 an ounce mark, buyers are heading back to the shops."

I would also note Rick Rule's recent observation that "it appears big money is circling the physical sector as well. The money has not yet ‘landed,’ but it is important to know what might happen to those markets if the ‘big money’ begins to settle. We believe it would not take much demand for physical delivery on the futures exchanges to create a very unsettling experience for the large institutions that are short the trade."

When the gold price bottomed at $250, there was talk of it going to $200 or below, which was mine cost at that time. It never got there because the smart money realised that at those prices gold miners would start to close and the supply reduction would push prices up. I believe they started to buy ahead of that, and those actions provided support and the basis of a new narrative for gold.

We could be seeing the same dynamic in play today. I'd suggest keeping an eye on the mainstream narrative around gold, just as much as the charts, if you want to work out if gold is bottoming.


  1. Bron,

    This "narrative" approach sits well with me. It helps to explain why good news is generally ignored in bear phases and bad news is ignored in bull markets.

    I'm looking forward to reading the post on "Epsilon Theory". Thanks for the link.

  2. So what you are saying is, regardless of the gold market realities, whatever MSM spews out (which forms the majority market opinion) should be treated as an indicator when buying/selling/holding gold? Now that MSM are bearish when taken collectively, perhaps now is that $250-> $200 moment?

  3. As regards the production cost of gold, I thought it had no bearing on the market price of gold given the very high stock to flow ratio of gold? If all the produced gold stays in its original form then surely it's not consumed hence remains as potential supply? Why should mining cost matter in this regard?

  4. At those prices gold miners wouldn't start to close, they were closing. I stayed at Gidgee goldmine, somewhere out of Meekatharra when it was shut down. Massive operation it was, yet went bust anyway.

    Swam in the open cut, as they had stopped pumping the groundwater out. Had to avoid the drowned Roo's though, they'd fallen in trying to make their way down the sides.

  5. It is important to remember that the narrative may vary from region to region, and that opinions may vary depending on how the 'official' story is treated in the media.

    At some point an event may occur, a 'trigger event' if you will. And then the story can more widely synchronize at the same time, and there is a strong reaction.

    This is the story of both panics and parabolic price moves.

  6. Bron--If you are referring to "charts" that contain useless hogwash, commonly described as "technical analysis", I agree that they, alone, will never indicate anything.

    However, if you are implying that "narratives" written by shill banksters and or shill "prognosticators" such as Goldman Sacks, Jeffrey Christian or Dennis Gartman can be relied on for anything except entertainment, then you're just as clueless as any of the many hypesters who think they know how to predict the future in this business.

    Paper gold and silver pricing must inevitably reach a "no-pricing point" due to manipulation, fractionalization and rehypothecation. Thus, the REAL BOTTOM will only occur once physical markets decouple from paper shenanigans where physical is priced by a free market place. It's difficult to say how this "free market place" could evolve. Could it include bartering, coin shops and or some kind of black market or gold standards? Who knows? One thing is certain, IMO. The price of gold and silver will eventually be controlled by some other form or mechanism.

    This "no-pricing point" I refer to will occur when the paper pushers realize they can no longer fool those who hold gold and silver paper promises.

    Until then, we should see more fundamental indications that this "no-pricing point" is nearing its trigger-point. Such "fundamental indications" are already happening and have been well-documented. Some of these are un-sustainable debt-levels, reduced comex and GLD gold inventory, increased premiums on physical and increased gold demand from Asia.

    No one, including hypesters such as Turd, Silverdoctors and KWN really know how long the manipulators will be able to perpetuate their Ponzi schemes.

    In the meantime, the only "strategy" that can be employed is implementing a sound monetary "mindset". This "mindset" adheres to one simple concept: "you can save only money--you can spend only currency. Money is gold and silver. Currency is someone else's IOU.

    Accumulate gold and silver by buying it on a regular basis and let the hypesters entertain you with their ridiculous predictions.

  7. "regardless of gold market realities"
    "why should mining cost matter"
    "can be relied on for anything except entertainment"

    I agree that the mainstream narratives are BS, but you need to read the Epsilon Theory link. It may have helped if I included this key quote:

    "Narrative is a social construction, a malleable public representation of malleable public statements that lacks any inherent Truth with a capital T. In fact, the public statements that go into the construction of a Narrative are often intentionally untrue.

    ... it is only important for a Narrative to sound truthful ... not that it be truthful"

    As I said in my earlier post on Ben Hunt's idea:

    "This is a challenging statement for goldbugs - it doesn't matter if you think gold is a store of value, or if it should be one, what matters is what most people think gold is."

    Your comments are about the reality. What matters is what people THINK the reality is.

  8. Bron--"What matters is what "people" THINK the reality is?"

    Who are these "people"?
    Coin Dealers?
    Coin Wholesalers?

    In a market that is heavily manipulated, these "people's" opinions mean nothing when banksters can pull rugs and ghost bid any time they feel like it.

    So, you missed the point again as you can't seem to understand that paper silver and gold price discovery has no meaning when it's controlled by a select few criminals. That's why this post caught my eye---The title contains a flawed premise.

    You're not the only blogger, however, (I mentioned others), who can't see that predicting controlled markets with "analysis" is meaningless.

    "TA" or "Sentiment" should not be confused with reality such as the obvious exodus of western gold to Asia or the blatant hypothecation in the comex.

    Additionally, you also seem to cling to esoteric notions of reality such as what you term "perception".

    In the end, don't you think REAL "reality" should drive your decisions?

  9. Jake,

    Yes you need to consider the fundamentals or reality of the market, but one of those realities is that the marginal buyers and sellers also include mainstream speculators and investors (non goldbugs) who have a lot of money, and if they believe some BS narrative that is going to stop them buying gold (or will get them to buy gold) then you have to factor that in.

    It is a dynamic situation, where the money power of mainstream thinkers vs money power of goldbugs using a different interpretive framework (and that framework can also contain a lot of BS narrative on gold) changes over time and thus the price can be driven by different groups at during different periods of time.

    This is what makes gold so hard to read. But if you are going to insist on ignoring BS narratives and saying X is the reality and thus the gold price Ought or Should be Y, then you are working with one hand behind your back.

  10. Secondly, the manipulations you talk of are only short term in nature. A narrative/game theory approach is looking at wider trends, where the money power drives that trend.

    I do not believe in price supression theories, as the capacity of CBs to do that over decades requires more physical than they have (and yes even if you manipulate via paper, you still need physical, but that is for another post).

  11. "it doesn't matter if you think gold is a store of value, or if it should be one, what matters is what most people think gold is"

    True, but you're leaving out the existence of Ponzi schemes. There is no substitute for the eternal quality of gold. It's just that 'money' leads to unusual behaviour.

  12. It doesn't matter if you think gold is a store of value, or if it should be one, what matters is what most people think gold is.

    Indeed, it doesn't matter what we as individuals think, it matters what the collective thinks, and, objectively, for reasons that are very compelling, there is a longstanding global consensus that physical gold is the wealth reserve par excellence.

    The reasons this is so have to do with the individual's need to hoard wealth in the event that they can no longer support themselves through labor. Because gold, over great expanses of time, measured in epochs, demonstrated that it comprised all (not just some) of the following attributes, fungible, portable, divisible, malleable, (virtually) indestructible, and, last but not least, of little to no use economically, -sorry silver advocates, silver is quite useful- it became the premiere store of value.

    It is, perhaps, the most successful "proof of concept" story in the history of civilization. And, it will be the asset that resets the monetary system and allows civilization to remain a going concern.

  13. You can only manipulate pricesa within an existing trend in the short run not the trend itself . If we have an established down trend then the greatest incentive to manipulate arises in " creating " fake rallies to short against ? This can only be a temporary state with an existing trend .