Sorry, Mike, I had to use the word discounting a lot. It is a very simple theory (more specially “hyperbolic discounting”) that few people understand (like Darwinian evolution in the biological sciences) that explains a large amount of information using a simple heuristic rule.

Apparently, people risk their lives to pick up Federal Reserve Notes which reflect higher short-term discounting rates.

However, I want to see your counterargument against my argument against your gold bearish thesis:

“I do not know if there will be a massive sell-off in gold because the key question is who is buying it, and how leveraged they are. I doubt the people who are buying the gold now are likely to sell it in a few years, and these people, I speculate, are generally wealthy so they could take a “paper” loss if gold falls in “value.” It is unlikely that this would facilitate panic selling (you did not argue for this though.)

I doubt those people would sell gold now due to a lack of liquidity, since they presumably have other assets with the necessary liquidity.

The gold market would be illiquid, and its price would be decided by a few number of bidders and sellers as most of the people who are holding gold or rolling over the futures (they might pay a small premium if there is a contango) because they hold it for diversification reasons to hedge against certain non-trivial outcomes where gold would have more utility. Of course, those people probably have flatter discount curves so they are willing to hold the gold.

Basically my argument against your hypothesis is that these people do not struggle to pay debt or bills so they do not have an immediate need to convert gold to cash. (Taxes might be somewhat different.)”

In other words, I do not think a large portion of gold buying is speculative. These people will not demand liquidity in the gold market, so they would not put downward pressure on gold prices. I also want to know the discount rates of most of the gold buyers. Are they as Mike speculated high, but above, I think they might be lower than what Mike thought.

But the best answer for when the bottom would occur would be in the form of a rhetorical question without an immediately quantifiable answer, and as Mike pointed out, one has to consider game theory considerations. (He said look at the VIX and the put/call ratio which provide information about market participant’s sentiment.) The biggest question one has to answer is when the Darwinian flush of the equity markets would finish. This is not a question of valuation (as stocks are not solely valued on valuation, but on discount counted cash flow according to the standard Gordon mode), but again a large part is based on people’s time preferences. Since people do not save as much in the US, the discounting rates would be higher than in the Japanese deflation which would have a stronger short term effect on stock prices causing the decline to be quicker. Also, in Japan, these was less labor competition and securer jobs after the asset bubble burst which is another reason for increased discounting. The deflationist paradigm has help those who embraced it understand this crisis. Another way to ask is to question when would everyone realize that buy and hold many work for some people, but not work for everyone? When people start realizing that equities have downward volatility in long run as well as the short-run as evidenced by the Japanese equity market for the last two decades? When do people who are saving for education, housing, and retirement leave the equity market (in a way similar to a Darwinian flush) when they realize that “long beta” is a bad “investment” “strategy” as they start demanding liquidity? Even people who are currently bullish (in the long term, not technical people who go long in anticipation of a bear market rally) on equities argue that if you need liquidity, then do not put money in the stock market. (see this example of a bullish view on equities, and it is the best argument I see for being bullish on equities, but it hasn’t convinced me: http://www.huffingtonpost.com/james-berman/reports-of-the-death-of-e_b_173460.html)

Corrections don’t mean the end of a bull market. In fact, they are the sign of a healthy one. As a matter of fact, Gold has “corrected” all the way from $250 an ounce in 1999 to $952 as of today’s close. A bull likes to shake off as many riders as possible - but I guess you are already off. Thank you.