When I read high-octane analysis like that, I say to myself: "Of course, it's so obvious that the gold price was heading for a precipice that this must have been known six months ago. But the funny thing is, I heard nothing about it then - which is a pity since that's when it would have been most useful."
OK, you can tell I'm being flippant. We didn't get this analysis because it was not possible. You can't explain the bursting of a bubble before it has burst because there is no telling that it's about to burst. Sure, you can have siren voices, but they're not quite the same. If it was clear that a bubble was about to burst, then it would not become a bubble. Within that paradox lies the fundamental - and arguably unsolvable - difficulty that is a broad explanation of the run-up to the miseries that have afflicted the developed world since 2007.
Still, it prompts the question: why not? If analysis can produce a top-class explanation of why the gold-price bubble - or any bubble - had to burst, then why isn't it possible to get inside the minds of the investors and speculators who drive markets and, from that research, produce models that may have predictive value or, at least, are more useful than post-hoc rationalisation?
It has been tried, in particular by Robert Shiller, the Yale University economist best known for his book Irrational Exuberance and a consistent critic of the notion that financial markets are rational. Helped by fellow academics, Professor Shiller sent thousands of questionnaires to investors - both institutional and private - following the 'Black Monday' stock market crash of October 1987 and after a steep fall in Japanese equities the same year. In similar studies, he quizzed investors about the apparent underpricing of stock market flotations and housebuyers about property bubbles. The aim was to find enough common ground in responses to quantify which factors were driving prices before and after a bubble burst.
Yet what emerges the strongest is the lack of interest among investors in the underlying factors that might do the driving. Or, as Professor Shiller said: "What struck me in reading the answers of US respondents was the frequency with which people wrote 'intuition' or 'gut feeling' or the like." That was when they were asked whether they had thought share prices would rebound in late October 1987. And when "respondents went beyond such vague statements the models expressed were usually extremely simple" - especially the notion that sharp falls should be followed by a reversal.
Similarly, the most common explanation among investors for the crash earlier that month was that the market was overpriced. "No consistent explanation was given what 'overpriced' means or why the market was overpriced," said Professor Shiller.
So what we have seems more like a tautology than an explanation - the market was going down because it was going down. But that could be a useful clue about how investors behave. Professor Shiller concluded: "The suggestion we get of the causes of the crash is one of people reacting to each other with heightened attention and emotion, trying to fathom out what other investors were likely to do." True, the feedback system they create could be complex, but, if the suggestion is correct, then we don't need to figure out the relative importance of external factors that could have contributed to a crash; nor is a trigger needed to explain it. In short, we don't need to know what investors think because they don't; we just need to know how they feel.
That indicates gold is now going down because it's going down. Granted, it may have chosen an odd moment to do it. After all, the precipitous descent coincided with a sea change in the attitude of central bankers towards monetary incontinence and inflation. Still, if the preceding paragraphs mean anything, analysis of exogenous factors is rubbish, so what central bankers do matters little.
Maybe if enough of the remaining bulls of gold put more money where their mouths are then the price will revive and another upwards chase can resume. But it won't if they do no more than repeat tired mantras such as: "We believe in the self-destructive nature of fiat money systems etc."
As to where the price is most likely to go next, presumably all bets are off since it fell through $1,600 at the end of March. If I were a technical analyst, I would look at gold's chart and speculate that the next support level could be as low as $700, the price from which gold began its post-Lehman surge in late 2008. But I'm not. Nor will I be a bull or a bear of the metal. It has always seemed beyond rational analysis and nothing that has happened in the past four weeks makes me think otherwise.
