Thursday, May 20, 2010

Gold and Silver Update

This past weekend I discussed the importance as an investor of using tools and information to help predict future events.

I used the example of tracking the CDS for country debt, which is important at a time when sovereign/government debt is in question around the world.

Another tool to help determine future markets events, especially in the short term, is the Daily Sentiment Index, which I have discussed in the past.

Last week gold reached a record high on the sentiment index at 98% bullish for two trading days.  This was a record high for the yellow metal.  Silver clocked in at 95% bullish.  This meant that 95% of investors felt that silver was going higher on that trading day.

When investors are all on one side of a trade, it usually means there is a short term correction coming.

You did not need the sentiment index to tell you this.  Anyone could have turned on their news during the week and heard over and over from every guest how much they love gold and how it needs to be a part of their portfolio.

Most of these same guests felt that gold was the last investment you would want to hold when it was $700 a year and a half ago.  (The CNBC dummy talking heads provide great short term indicators to help you know when NOT to buy an investment.  They are almost like clockwork.)

Ultimately gold and silver are going far, far higher.  However, during every bull market you experience strong corrections which are a healthy sign.  It helps shake out the weak hands, like the people you see on television.

The strong investors build cash during market highs and add to their position when they pull back.  They root for corrections because they understand the big picture.  All the rest is noise.

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