Why? Because just like everything else in the world gold will eventually regress to the mean. The law of action and reaction says that the further anything is pulled away from the mean the more violent the snapback tends to be when it comes.
You can see in the following chart that gold is now about as overbought on a weekly basis as it has ever gotten. Probably not exactly the best time to get wildly bullish.
Unfortunately rabid bullishness is exactly the emotion brought out in investors when one of these things appears. When we should be extremely fearful we often become euphorically complacent.
The next chart is mining stocks.
At today's intraday high the HUI was stretched 42% above the 200 day moving average. There have only been 4 rallies that have stretched further above the mean. Each and every one of them underwent a violent correction averaging -22% in a month or less as soon as they topped out.
Again I'll stress that 42% above the mean isn't a sign that happy times are here to stay. 42% above the mean is in fact a sign that one should be "hand in the piranha tank" nervous. The question isn't whether or not you are going to get bit, it's how many fingers are you going to lose.
Posts
