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Gold Capitulation? Not Likely
Jonathan Kosares
If you’re waiting for capitulation in the gold market, don’t hold your breath – An argument for why the bottom in gold will come with a whimper, not a bang and why the mainstream media might be looking for capitulation in the wrong place.
by Jonathan Kosares
ca·pit·u·la·tion noun \k?-?pi-ch?-‘la-sh?n\
When investors give up any previous gains in stock price by selling equities in an effort to get out of the market and into less risky investments. True capitulation involves extremely high volume and sharp declines. It usually is indicated by panic selling.
Having just finished reading the umpteenth article on gold going to $700 an ounce on a wave of panic selling reminiscent of the 1987 stock market crash, with ‘complete despair with even the most ardent of gold bugs’, I found myself again shaking my head in disbelief. This is what you get, I suppose, when you have a CNBC stock shill analyst covering the gold market.
“More Pain Ahead for Gold Bugs”, was another headline. The assault against gold has…wait for it…reachedmania levels, with price predictions that border on outrageous finding their way into financial headlines daily. Does this sound familiar? It does to me. The last time this happened was when gold was charging past $1800 in a swirl of a US credit downgrade and full throttle QE. Calls for $2500, $3000, $5000 and more in the gold price littered the mainstream press. The consensus was that the gold bull market would top out in a blaze of parabolic glory. Everybody loves a good bandwagon (especially, I’m learning, the mainstream financial press – see current position on gold), and even the most ardent of gold bears were on board. But as it turned out, gold came off its highs at $1920, and traded within about a 15% band of that high for the next 16 months. Hardly a parabolic blaze of glory, and a top, that while obvious in retrospect, was rather subtle at the time.
Back to the present. The almost painfully redundant prediction I keep seeing regarding the gold price is that ‘when gold bottoms, you’ll know it, and its going to be painful.’ In other words, complete and total capitulation. But is capitulation a realistic future for the gold market, or is the notion nothing more than the latest buzzword of a biased, shortsighted mainstream financial media?
My answer, as you’d likely expect, is the latter.
As the definition cited at the beginning of this article notes, capitulation is marked by complete abandonment of an asset class to the point of panic selling, causing massive downward volatility in the price. But that characterization fails entirely to factor in the mentality of the physical gold owner, and the mentality of countries like China and India, where the role of physical gold ownership is innately understood, not questioned.
The average gold owner isn’t going to bother going to his safe deposit box to pull out his physical gold to sell because the price is dropping. To him, gold is insurance. Despite new stock market highs and steady stream of ‘all’s well’ news, in his estimation, the world hasn’t changed enough to warrant selling his monetary insurance. If anything, to the asset preservation minded investor, dropping prices seem like a good opportunity to supplement his or her holdings – in fact as the price dropped just recently, mints around the world reported an explosion in gold and silver bullion coin sales (see US mint figures here).