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In an essay from today entitled "Five Shocks Push Investors Off Balance," ??Marc Chandler, author of the Marc-to-Market web site, explains away the now well-documented disparity between the demand for GLD (paper gold) and the demand for physical bullion over the last week. The same piece includes some interesting analysis regarding other recent anomalies in the current market environment, but the following statement jumped out at me:


...the distinction between decline in paper claims on gold (futures and ETFs) and physical demand (gold bullion and coins) that some gold proponents have resorted to is not very helpful. It is similar to contending that the drop in the corn futures is somehow less significant because consumers are still buying corn on the cob or cornflakes... [Emphasis added.]

I don't know what other METAR readers think about the above statement, but I think it is at the very least disingenuous - and my initial reply to Chandler's cornflake analogy would be as follows:

"If grocery stores around the world rapidly were running out of corn on the cob and cornflakes due to sudden, intensified consumer demand which persisted for 5 consecutive days (with streams of shoppers queuing up cash in hand), dealers in corn futures ought to take notice and adjust accordingly."

In last week's physical gold bullion retail markets, consumers worldwide reacted in virtual unison - suddenly becoming purchasers upon learning of the precipitous fall in gold prices. This is significant in that it runs counter to the paper market's expectations. I.e. - I just don't think that Chandler's "cornflake" analogy works.

Sometimes I think those who deal in financial assets can become detached from reality. It is no wonder that 90% of the "smartest guys in the room" completely missed the clues leading up to the 2008 sudden collapse in the subprime mortgage market.

Something I have said in the past with regard to US consumers may at some point become appropriate for the consumers in other developed markets, as well:

"One can never know what Americans will decide to do - but it is a pretty safe bet that whatever it is, they all will do it at once."

Perhaps sooner or later, an investment school of thought will develop that gives proper attention to crowd psychology/crowd dynamics. Such a school of thought would have to acknowledge that "the best-laid plans of mice and men" can come to naught if the planners fail to recognize that people do not always respond to stimuli as expected. The Ivory Tower Central Planners consistently behave as if they "know better" than the hoi polloi not only what is "best" for said persons, but also can predict what the hoi polloi will do in given circumstances (natural or manipulated).

In an era where a trend or a fad can develop overnight via Twitter, Facebook, E-mail and informal Internet "reporting," such online gossip and chatter can influence consumer behavior more than the Ivory Tower Central Planners seem to be willing to acknowledge.

A few YouTube videos of the recent "Harlem Shake" meme is all one needs to look at in order to recognize that centralized planning, control and manipulation can only go so far to anticipate or influence the next move of the individuals who make up crowds.

Here's a little more information about crowd psychology:

"...Deindividuation theory

Deindividuation theory argues that in typical crowd situations the borders and distance between individuals tend to disappear as individuals tend to merge into a larger whole. According to Gustave Le Bon, this resulted in ‘mental unity’. American social psychologist Leon Festinger and colleagues first elaborated the concept of deindividuation in 1952. It was further refined by American social psychologist Philip Zimbardo, who spelled out in great detail why mental input and output became blurred by such factors as anonymity, sensory overload, etcetera.

Convergence theory

Convergence theory holds that crowd behavior is not a product of the crowd itself, but is carried into the crowd by a convergence of like-minded individuals. In other words, while contagion theory states that crowds cause people to act in a certain way, convergence theory says the opposite: that people who wish to act in a certain way come together to form crowds..."

Cornflakes, anyone?

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