Gold Prices: Here’s Why The Market Dropped

It may be hard to believe, but the number one question thrown at this Gold Enthusiast the last few days has nothing to do with gold prices, per se. Instead, people have been asking: Why did the stock market go down?

Not the expected “how are gold prices doing compared to the market”, or the time-tested favorite “is it time to buy gold?” 

People are nervous.  Is it justified?

The answer is that no one can tell you for sure.  In the long run, markets tend to return toward a few old-faithful indicators.  As an example, the P/E ratio – stock price to company earnings – tends to gravitate toward 17:1 over the long haul.  Recently it’s been as high as 24:1.  That sounds like stocks were overpriced.

Some say it’s the new normal.  Some say it’s Fed-inflated money chasing overblown values.  Some say it’s Bitcoin.

Yeah, whatever.  All those things were true two, three, four weeks ago.  Yet the market kept going up.

Many of these “reasons” have been true for years.  Under President Obama, the national debt doubled in just 8 years.  Nancy Pelosi is all riled up about $200 billion under Donald Trump – why was she so enthusiastic to vote for $10 TRILLION in debt increases before?  If the market was going to crash because of accumulating national debt why didn’t it happen years ago?

In the end, there are always plenty of reasons why markets go up and down.  There is always a good “Top 5 Reasons The Market Will Crash” list, with good reasoning behind it.

There is also always a “Top 5 Reasons The Market Will Rise” list. And those reasons are good too.

All the reasons the talking heads give on TV were true last week, the week before, and the week before that.  Heck there’s been a threat of gov’t shutdown since Jan 2nd.  But the market didn’t go down then.  So why did it decided to drop last Friday?

There’s only one right answer:

Because it did!  

 Related: Gold Production is Setting Records. Here’s What You Need to Know. 

If the market – comprised partly of its participants – was completely rational there would be very little advantage to be gained by any form of picking, whether stock, ETF, CEF, commodity etc. Stocks, gold prices, and the rest would change instantly as significant news came out, then remain static until the next bit of significant news.  There would be no daily up-and-down, back-and-forth.

As that clearly doesn’t happen, something else is at play – which are the millions of opinions, nerves, and actions of the bipedal beasts who participate in it.  Acting through a combination of fear, greed, calm, and storm.

No one has ever come up with a 100% accurate fool-proof method to predict exactly when markets go up and markets go down.  The closest one I’ve seen is they go up when people are happy, and they go down when people are scared.  Other than that, it’s a crap shoot.

It’ll be that way until the AIs take over, I guess.

There are lots of good, solid methods for investing and trading.  To these eyes, investing is one thing – playing the long game – and trading is another – looking for short-term gains.  Long-term can be easier to do OK at, though true mastery still takes time.  Short-term trading can be a lot more difficult, especially when things are chopping around.

Warren Buffett famously said “When the tide goes out, we see who’s been swimming without trunks.”   This week may mark the changing of a 9-year incoming tide.  And we may soon find out who’s been swimming naked.

The best advice is not to panic.  You bought your long-term investments for good reasons (we hope).  If those reasons are still good, wait a bit longer.  If you were in some questionable/risky/crappy things that have tanked, see if there are realistic reasons it’ll come back.  If not, sell it now and sit on the cash until you calm down.  Then put it toward smart things.

There has been no new economic news out the last two weeks that screamed “the market will crash now”.  The bipeds are just hitting the Sell button again.  When they stop doing that, it’ll be time to load up for the next melt-up.

And by the way: If things get really ugly, remember people buy gold when they’re really upset. That should help gold prices out in the long haul. 

Sincerely, The Gold Enthusiast

Disclosure: No specific securities were mentioned in this article.  The author is long NUGT and JNUG, and may day-trade these positions in the next 48 hours

 Related: How Much Gold did the Middle East Buy in 2017? Learn More Here

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