Time For A Different Perspective On Gold

Elliot Wave Technical Analyst & author @ Elliott Wave Trader
January 4, 2015

perspective on goldThis being my first feature article at Gold-Eagle, I would like to thank the operators of the site for reaching out to us at Elliottwavetrader.net to be a featured writer on their site.  It is truly an honor for us to be involved with Gold-Eagle.

Many of you may recognize me as being the number 1 ranked metals analyst on Seeking Alpha for the last 4 years.  What was unusual about my ranking was that it was earned on a site which is only interested in fundamental analysis.  Yet, I gained a huge audience in guiding people to ignore the fundamentals, as they have only lead people astray over the last 3+ years.  

For those who have not read any of my analysis over the last few years, allow me to introduce myself and provide an overview of how I see the metals world. 

Those that have read me on Seeking Alpha already know that market fundamentals do not play a role in my analysis methodology.  While that statement may have just shocked many of you, I will hope you will allow me to explain why, and then learn how that has allowed me to be on the correct side of the metals market for years, while many have been seriously hurt by this 3+ year correction.  In fact, the last 3+ years have left many scars on metals investors, while we have done extremely well in this environment due to our differing perspective.

Let me start out by saying that I am neither a metals perma-bull nor perma-bear.  I am neither a gold bug, nor do I feel that “it has no utility.”  Rather, I am quite agnostic regarding my “feelings” about the metal, as my primary concern is simply to be on the right side of the market in order to make money.

Unfortunately, many have become quite emotional over their perspective on gold.  And, that emotional attachment has blinded many to this correction, which has caused much pain in many accounts. 

Let me also note that I am a VERY LONG TERM gold bull. In fact, I am in the camp with those who see gold going over $10,000. But, the major difference is that I believe it will take another decade until we get there.  However, this long term view did not prevent me from noting in a widely published article back in August of 2011 that “I would seriously consider anything approaching the $1,915 level to be a potential target for a top at this time.”  And, as we now know, gold topped in September of 2011 within a few dollars of my target.  As a response to a question I received in the comments section to that article – and even before gold actually topped -  I further noted:

“Based upon the Elliott Wave Principle, I would expect a very large pullback. In fact, the target for such a pullback will probably be a minimum low of $1,400, it could fall as low as $1000, or even as low as $700. It will depend upon how the decline takes form. But those are very viable targets for gold on the downside.”

And, for those of you that remember the parabolic phase in gold at the time, most were quite certain that it was “in the bag” that gold would exceed $2000.  So, most simply dismissed my analysis at the time as the rantings of a madman, especially when I said it had the potential to drop to the $700-1000 region when everyone was so certain of $2000+. But, again, allow me to remind you that I do not get tied emotionally to gold.  Rather, I simply want to be on the correct side of the market.

In fact, just before QE3 was announced, and as most were quite confident the metals were about to skyrocket, my primary analysis called for a strong drop.  Well, the market turned down within pennies of my turning target on silver.  And, yes, everyone thought I was off my rocker for suggesting short positions at that time in silver in face of QE3.  But, we now know how that has turned out.  Silver was more than double of where we now find ourselves, and those that shorted with me have done quite well.

So, if it is fundamental analysis you seek, there are many analysts out there that will oblige and provide your fill. If you want an unbiased approach as to how to be on the right side of market movements in the metals world, then you have hopefully found a new home.

Over the next few weeks, I will review how and why fundamental analysis has failed in the gold market for the last 3+ years, and why analyzing market sentiment is a much more accurate way to determine the direction in the metals market. I will also analyze the issue of “market manipulation” from a sentiment perspective, which may be quite eye opening to many.

So, let’s start with a review of the past 3 years from a “fundamental” perspective.  For those of you that have had a bullish bias over the last 3+ years, you will remember all the reasons to which fundamental analysts pointed as to why metals will soar.  We had QE, the Indian demand, the Chinese demand, the Russian/Ukrainian issue, the Middle East eruptions, and on and on. And, unfortunately, anyone who invested on the long side based upon any of these “reasons” found themselves to be quickly underwater, especially in silver, which has lost over 70% of its value from its 2011 high to its 2014 low.

For those staunch fundamental followers, have you ever questioned your belief in fundamentals when the markets moved in such dramatic fashion opposite to those fundamentals over the last 3 years? The reason most still cling to fundamental analysis, despite its recent failure, is very simple if you understand human nature:

“As human beings, we have a deep rooted desire and need to feel as though we are in control of that which is around us. To that end, we need to believe that everything around us can be explained or understood from a logical perspective. Unfortunately, that is not possible within the world we live, if we are truly intellectually honest about it. But, our human egos do not allow us to accept this truth. So, our ego drives us to continually believe that we are able to divine the future through looking at the past. And, no matter how often this perspective is disproven by cold hard facts, the human ego simply continues to drive us to force a perspective that is wrong because it makes us feel as though we are in control.

So, if one wants to continue to view markets from a logical or reasoning standpoint, then you will continue to stand shoulder to shoulder with the rest of the market participants, and most often find yourself on the wrong side of the market. However, if you are able to open your mind, then you can actually recognize what has been driving the markets up or down at all times, and not just supposedly some of the time.

I am sure you have all heard the famous statement that "the market will eventually follow fundamentals." I am sorry, but I laugh every time I hear this statement, which amounts to nothing less than "hoping." It means that the analyst has been directed by his "fundamental perspective" to be on the wrong side of the market, and he is hoping that the market "eventually" moves toward his fundamental perspective. Unfortunately, many are now in this position in the precious metals market.

And, just because market direction and fundamentals are pointing in the same direction for a period of time, it just means their relationship is simply coincidental and not causative. Rather, I can point to market sentiment at all times to determine the movement of the market. There is a true causative relationship between sentiment and price action that is in effect all the time. To me, this means that it is sentiment that is always controlling a market, and not fundamentals.”  GLD: Please Do Not Overreact, November 9, 2014, Seeking Alpha.

Please try to open your minds to the fact that the metals are an “emotional” trade.  In other words, sentiment is what controls metals movement and not fundamentals.  Therefore, the question one must ask themselves in attempting to apply reason to a market driven by sentiment is: Have you ever tried to reason with someone who is being emotional?   How well did that work out for you?  Probably just as well as maintaining your strong bullish bias in silver while it lost 70% of its value.  So, maybe it is time to consider a different approach?

Next week, I will go into a general discussion as to why sentiment is a much more reliable determinant of market direction relative to fundamentals.

For now, I simply want to give you my perspective on the coming week in GLD.  As long as the GLD remains below the 116 region, we have a set up in place that can take us down to the 100 region over the next few weeks.  This is a 1-2, i-ii structure which should trigger by early next week.  The triggering event is a break down below Friday’s low, and it would have me looking towards our long term target in the GLD in the 98/100 region.  Should we see a break out over the 116.25 region, we will need to re-evaluate the structure, as it could mean this larger corrective structure will take longer before those lower lows are seen.

Ultimately, I do not believe that it is highly likely that the lows for gold have yet been seen even if this immediate bearish pattern is invalidated.  I am still looking for at least one more lower low before the resumption of the long term bull market.  And, remember, our minimum target for a bottom in GLD is the 105 level, with the ideal target at 98/100, and the potential for it to see an overreaction break down to as low as 75, as I noted back in 2011.

See Avi’s chart illustrating the wave count on the GLD.


Courtesy of Elliottwavetrader.net

Avi Gilburt is a widely followed Elliott Wave technical analyst and author of ElliottWaveTrader.net, a live Trading Room featuring his intraday market analysis (including emini S&P500, metals, oil, USD & VXX), interactive member-analyst forum, and detailed library of Elliott Wave education. You can contact Avi at: [email protected].

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