What REALLY Controls The Metals Movement? (Part 2)

February 24, 2015
Elliot Wave Technical Analyst & author @ Elliott Wave Trader

precious metal price movement

Part 1 of this article is HERE.
Part 3 of this article is HERE.

Why Have Fundamentals Failed?

In my humble opinion, I believe that, as more and more study is conducted into the social aspect of economics, we will ultimately abandon the use of “fundamental analysis” as a main research tool in identifying market direction.  In fact, many noteworthy scholars and economists have begun to recognize that using fundamental analysis to determine market turning points is akin to driving a car blindfolded, while facing the rear window. 

As an example, in a paper written by Professor Hernan Cortes Douglas, former Luksic Scholar at Harvard University, former Deputy Research Administrator at the World Bank, and former Senior Economist at the IMF, he noted the following regarding those engaged in “fundamental” analysis for predictive purposes:

“The historical data say that they cannot succeed; financial markets never collapse when things look bad. In fact, quite the contrary is true. Before contractions begin, macroeconomic flows always look fine. That is why the vast majority of economists always proclaim the economy to be in excellent health just before it swoons. Despite these failures, indeed despite repeating almost precisely those failures, economists have continued to pore over the same macroeconomic fundamentals for clues to the future. If the conventional macroeconomic approach is useless even in retrospect, if it cannot explain or understand an outcome when we know what it is, has it a prayer of doing so when the goal is assessing the future?”

Fundamental analysis is generally defined as a method of evaluation that attempts to measure “value” by examining related “current” economic, financial and other qualitative and quantitative factors. Fundamental analysts will utilize “current” macroeconomic factors (like the overall economy and industry conditions) and company-specific factors (like financial condition and management).

Therefore, market fundamentals are the existing conditions of a market based upon historical data. In order to utilize this information for predictive purposes, economists will employ a form of trend extrapolation. This effectively presumes that the current market conditions will continue indefinitely into the future, until they do not. This is possibly the crudest form of linear extrapolation. But, can it really foresee turning points in a non-linear environment? If we wait for the underlying “fundamentals” to change, are we not already within a different trend within the market that is now changing underlying fundamentals?

Well, let’s look at the metals world and see if this has helped us over the last 3 years.   During the entire 3+ year decline in the price of metals, I have read so many analysts proudly note that “all of the fundamentals that supported the precious metals trade on the long side in 2011 are still there.” I am sorry to put it this way, but I almost gag when I read that, and really cannot believe that people have the gall to make such a comment after silver has lost 70% of its value from the highs.  So, the fundamentals that support a silver price of $50 are the exact same fundamentals that support a silver price of $14?  Does it sound like these “fundamentals” have been helpful or accurate?   

Nothing evidences the utter failure of “fundamental analysis” in the silver market more than this.   Anyone following such an analyst should be incredibly angry at the continued utterance of such drivel in light of a 70% loss in value.  And, every time the metals move into a short term counter-trend rally, these pundits dust off these same old “fundamentals,” such that we are heading into the Indian wedding season, demand in China is strong, etc., and sell them to the public.   

The question is if, you, as an investor, will be foolish enough to continue to believe these supposedly “fundamental” perspectives in the metals, despite their clear lack of efficacy over the last three years?    It is about time that all of you that have been severely burned by “fundamentalists” in the silver market “get up now, and go to the window, open it, stick your head out and yell ‘I’m mad as hell, and I’m not gonna take this anymore.’”   Or, you can at least post it as a comment to any articles that you see spewing such flawed perspectives.

As I noted last week, that is exactly what this commenter did with an article citing these same bullish “fundamentals” only several months ago:

“You know something? Your article is so well written, so "clean", and so logical constructed, that it can only be WRONG. Each time I've trusted in this kind of speech, I've lost money.”

Next week, we will attempt to compare and contrast why sentiment analysis has a clear edge over fundamental analysis to determine market direction on all time frames.

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Courtesy of ElliottWaveTrader.net

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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: info@elliottwavetrader.net.

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