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Confessions of a Gold Analyst: Why Analysts Get Caught Up In The Herd

 -- Published: Monday, 26 October 2015 | Print  | Disqus 

By Avi Gilburt

I am starting to see a lot of anger being directed toward gold analysts.  While most of them stayed bullish for this entire decline for the last 4 years, I cannot say I am surprised.  But, remember, it is simply human nature and part of the genetic design of human beings to be caught up with the rest of the herd. 

Humans are hard wired for herding within their basal ganglia and limbic system in their brain, which is a biological response they share with all animals. In fact, in a study performed by Dr. Joseph Ledoux, a psychologist at the Center for Neural Science at NYU, he noted that emotion and the reaction caused by such emotion occur independent of, and prior to, the ability of the brain to reason.

Moreover, in a paper entitled “Large Financial Crashes,” published in 1997 in Physica A., a publication of the European Physical Society, the authors, within their conclusions, present a nice summation for the overall herding phenomena within financial markets:

Stock markets are fascinating structures with analogies to what is arguably the most complex dynamical system found in natural sciences, i.e., the human mind. Instead of the usual interpretation of the Efficient Market Hypothesis in which traders extract and incorporate consciously (by their action) all information contained in market prices, we propose that the market as a whole can exhibit an “emergent” behavior not shared by any of its constituents. In other words, we have in mind the process of the emergence of intelligent behavior at a macroscopic scale that individuals at the microscopic scales have no idea of. This process has been discussed in biology for instance in the animal populations such as ant colonies or in connection with the emergence of consciousness. 

And, remember, analysts are human beings and are prone to the same drive for herding as everyone else. The appropriate question is if they possess the tools to rise above the herd.  That is the quality of a truly good analyst.

In 1996, Robert Olson published a study in the Financial Analysts Journal in which he studied the effects of herding upon “expert” analysts’ predictions of corporate earnings. After studying 4000 corporate earnings estimates, he arrived at the following conclusion:

Experts’ earnings predictions exhibit positive bias and disappointing accuracy. These shortcomings are usually attributed to some combination of incomplete knowledge, incompetence, and/or misrepresentation. 

Mr. Olson’s article suggests that “the human desire for consensus leads to herding behavior among earnings forecasters,” with the herd always looking for the current trend to continue unabated and indefinitely.  But, those that have experience in the non-linear world of financial markets understand that the most bullish calls by these “experts” almost always come at the top of a market or stock, while the most bearish calls are seen near the bottoms.  And, I still chuckle when I see downgrades to a stock posted AFTER a major decline has almost completed.

What is most interesting, which I have pointed out before, is that a number of those analysts that remained bullish for most of this 4+ year correction turned bearish a few weeks ago at the last lows, while we, at, were buying.  And, those that read their articles are noticing.  A few weeks ago, I found this comment to one such analyst, but I have seen quite a few just like it over the last month or two: 

“For the first 80-90% of this decline you have been proclaiming a "once in a lifetime" bull market to come only for the market to keep going lower. Then, you started showing the various analogues, again pointing out the "vast wealth" that lay ahead, only for the market to keep going lower.  For the past few months you have turned decidedly towards the other side, telling us how "each rally is doomed". How is it that people like yourself claim to be "experts" and why should anyone believe what you have to say since you've been dead wrong the whole way down.”

Again, I cannot say I can blame these metals investors. Many were told to continue buying at the all-time highs, and a number of gold dealers have noted stories of people taking out lines of credit against their homes to buy metals near the highs.  So, it is quite understandable to begin to see anger being displayed by many in the market.  

In order for one to outperform the market, one must have an understanding of how the herd works.  If one is unable to understand the herd, then one is destined to become a member thereof, and that clearly includes the analyst community.  Unfortunately, the last 5 years in the metals market have seen many learn that lesson the hard way.

If you would like to learn how we are able to rise above the herd, feel free to join us for a two week free trial to our Trading Room at

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 -- Published: Monday, 26 October 2015 | E-Mail  | Print  | Source:

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