By Elliott Wave International
“In what traders called a ‘bear raid,’ sellers on Monday dumped an estimated 33 tonnes of gold in just two minutes on exchanges in Shanghai and New York, sending prices on a nearly $50 downward spiral from which they never fully recovered.” (Reuters, July 21)
If you live in the U.S., maybe you’ve noticed lately that “We Buy Gold!” signs are disappearing from sidewalks in front of pawn shops. The signs really began popping up in 2010-2011, when gold prices were climbing to their all-time high of $1900 an ounce. And even after gold tumbled from that peak in September 2011, the signs stayed up for months. Only after gold fell below $1200 an ounce in 2013 — and price stayed flat for almost two years — did “We Buy Gold!” signs become scarce.
Someone may chuckle at this brief record of poor timing decisions, and maybe even put it down to the general investment ineptitude of laymen. Certainly, big-name gold market players — like central banks, for example — with their access to privileged information and armies of PhD’s would not make timing mistakes like that. Right?
Below is an excerpt from the April 2015 Elliott Wave Theorist, published monthly since 1978 by Robert Prechter, EWI’s founder and president. It’s a brilliant account of how central banks follow the same buying and selling impulses as the “less sophisticated” investors.
This excerpt will also give you an answer to the question,
“When will gold prices finally find a bottom?”
Central Banks and Gold
(by Robert Prechter, excerpt, April 2015 Elliott Wave Theorist)
Back when I worked at Merrill Lynch in the 1970s, I studied a number of data series useful for technical analysis. Bob Farrell had odd-lot buying and selling data going back decades, a rare treasure. Hardly anyone was buying and selling in odd lots anymore, but I wanted to see if any useful pattern emerged.
I found that the old saw that “odd-lotters are always wrong” is not quite accurate. Their behavior went like this: Most of the time when the market rose, odd-lotters would sell into the advance, and most of the time it fell, they would buy into the decline. But their behavior would change right at the turns. Suddenly on a plunge to a new low in the market, the odd-lotters would sell into the decline. It meant that their psychology had flipped from believing the market was offering bargains to believing it would go down much further. The change of opinion was so powerful that they continued selling long after the market subsequently turned up. The reverse would happen at tops: They would sell into the rise until near the end, then they would buy into the last rally. When the market turned down, they would keep buying for a long time.
After leaving Merrill, I no longer had access to these data. But the insight wasn’t wasted. It seems that one institutional group behaves in the same manner as the old odd-lotters: central bankers.
…central bankers were selling their heads off at the final bottom in gold in 1999-2001. When the bull market started, they increased their sales, reaching a peak rate of selling in 2005. They continued to sell right into the deepest decline of the bull market, which occurred in 2008. Over the next two years, as gold took off again, they slackened their rate of selling and then edged toward becoming slight net buyers in 2010. Activity for 2009-2010 indicated a neutral stance for those years, as central-bank vaults sat depleted and gold continued to rise. Finally in 2011, the year of the top, they couldn’t stand it anymore. They reversed course for the first time in well over a decade and started buying gold heavily, during the final rise to the highest gold prices ever. Silver reversed into a bear market in April that year. Gold finally peaked in September and crashed $400/oz. in a month. After gold’s initial plunge, it rallied through most of 2012, and central banks, believing they were being offered bargains on the way to far higher prices, bought at an even faster rate. Perfectly mirroring odd-lotter behavior, they have continued to buy heavily all the way down.
In other words, in the year of the top central banks decided the long term trend was up, so they chased the market, and every down year since has looked to them like an opportunity to buy more gold at “bargain” prices.
When the bear market in gold approaches its end, central bankers will finally reverse the trend of their transactions and sell into the downtrend. When they do, it will signal the final price decline into the next major bottom.
…If you buy when central banks finally sell, you will probably succeed at investing in gold.
Learn What REALLY Moves the Markets
In just 12 minutes, Bob Prechter reveals eye-opening evidence that shows external factors — be they interest rates, the Fed, war or peace, oil prices, inflation, quantitative easing, even terrorism — do not in fact regulate financial markets as most experts claim.