The dynamics of financial markets are often complex and can appear contradictory. Despite any fluctuations, my outlook on bullion remains positive. This article offers a comprehensive analysis of how market trends are likely to shape asset pricing, particularly gold, as we navigate through 2025.
Prices rarely move in a linear fashion; they undergo oscillations influenced by a plethora of traders and investors whose sentiments vary. Some participants may feel that prices have surged too high, prompting them to take profits and exit their positions. This natural price-discovery mechanism is integral to market function and can ultimately fortify the prevailing bull market. Confusing? Let me break it down for you.
Understanding Market Behavior
A significant portion of traders and investors tend to think in short timeframes, often taking modest profits from trades. This tendency can exert downward pressure on asset prices temporarily. However, new short-term traders typically enter the market with higher price targets, driving the momentum of the bull run forward.
A robust bull market, or even a supercycle—defined as the most vigorous type of bull market—arises when the selling by weaker hands is effectively absorbed by stronger hands. These informed investors prioritize long-term views and are not fazed by minor price fluctuations.
Potential Corrections in Gold Prices
Recent analyses point towards a hypothesis of procyclical hysteresis in the financial markets starting from 2025. Procyclicality refers to an economic phenomenon where asset prices move in alignment with the broader economy. When hysteresis is introduced, prices initially change direction slowly, often leading to larger escalations over time, comparable to a snowball gaining momentum downhill.
As we stand currently in a counter-cyclical phase—where assets move contrary to the economy—trading patterns reminiscent of the stock market surge during the COVID-19 lockdowns are evident. The transition from a counter-cyclical to a procyclical market can be tumultuous, particularly for retail investors who are accustomed to a steady increase in asset prices and the notion of “buying the dip.” Once procyclicality emerges, unexpected losses may unfold, gradually building momentum as investor sentiment shifts.
The Impact on Gold Pricing
At some point in this time-price continuum, average retail investors, faced with mounting losses, may surrender all long positions, including traditionally safe assets like gold. This capitulation could lead to a decline in gold prices.
Estimating Potential Declines in Gold Prices
The extent of any decline in gold prices will largely depend on how swiftly financial asset prices fall. This phenomenon is not rooted in a lack of faith in gold but rather in the financial distress affecting speculative assets. Higher levels of distress will likely result in increased forced selling, which could further exacerbate gold price declines.
Technical Analysis of Gold Prices
Observing a monthly gold price chart spanning over 13 years reveals a compelling narrative. Following bullish movements during the 2008 financial crisis, gold prices entered a range-bound phase. The peaks, denoted by red trendlines, indicate that the $1,900–$2,000 range from 2011-2012 posed resistance due to the “overhead supply” from investors wanting to break even.
Identifying Buyer Behavior: Weak Hands vs. Strong Hands
To effectively gauge whether rising prices are supported by strong or weak hands, tracking money flows in today’s electronic markets is invaluable. One approach is to calculate the Ticket Size per Trade (TST) by dividing the total quantity bought by the number of transactions during a specific timeframe. Retail investors typically acquire limited amounts (1-2 kilos of gold), while larger trades often indicate the presence of institutional investors.
If you observe an increasing TST but a corresponding rise in the number of transactions, it suggests that larger players are in the market, absorbing selling pressure. This dynamic can be crucial for investors looking to time their entries into the market.
Investment Strategy Moving Forward
In light of potential market corrections, it may be prudent for investors to keep some cash reserves. Should gold prices decline owing to financial asset distress, this offers a prime opportunity to increase positions in gold. Remaining agile and prepared to take advantage of favorable market conditions can significantly enhance investment outcomes.
Note: The analysis presented here is purely educational and based on data interpretations. It does not serve as an investment recommendation. Always consult with a financial advisor to consider investment decisions cautiously.
