The Gold Market Is Going Insane
             




 
Summary
  • Market participants somehow fool themselves at inflection points.
  • What affect will QE4 - if it does come - have on gold?
  • Upcoming week's expectations.

Many quote the famous words of Winston Churchill "Those who fail to learn from history are doomed to repeat it." However, if one delves further into where this astute phrase originated, you are led back to George Santayana (1863-1952), who likely "borrowed" it from Edmund Burke (1729-1797), a British philosopher, who stated that "Those who don't know history are destined to repeat it."

As many of you know, I peruse the other metals articles on Seeking Alpha, as well as many other sites. And, to say that I am simply astounded by some of the things I am reading is probably an understatement.

With the strength of the dollar, and the correction we are seeing in the equity markets throughout the world, the hot topic is now how the Fed "must" do QE4. Now, I am not even going to discuss how this is akin to a cocaine addict needing its next fix. My issue is that there are many that are suggesting that such further stimulus is what will cause gold to skyrocket.

I am sorry for being so blunt about this perspective, or if it may insult some that believe in this perspective. But, I simply have to ask the question "have you been sleeping for the last 3 years?"

The definition of insanity is doing the same thing over and over, yet expecting a different result each time. And, I propose that those that are now trying to dust off the perspective that more Fed action will cause gold to skyrocket are nothing less than insane. So, let's look at a snapshot I provided here at Seeking Alpha several years ago of Fed announcement history. Once you read through it, you will see why those maintaining such perspectives are clearly not burdened by the facts, and you should not be drawn into their vortex of insanity.

I want to start by quoting something I wrote back in April of 2012, which I hope will remind you of the "correlation" between the Fed announcements and the price of the metals:

On February 23, 2012, I provided advance warning of an impending decline in silver to the Seeking Alpha readership, and also provided targets for the decline. On February 28, 2012, we issued a suggestion to ElliottWaveTrader.net members to exit short-term metals positions, and for aggressive traders to even short the market, as the Elliott Wave pattern off the lows had completed.

The very next day, on February 29, 2012, Ben Bernanke was in front of Congress providing his semi-annual report on the economy, and the precious metals market entered into what some termed a "flash crash." Some of our members made 500% returns in that one day.

However, all Chairman Bernanke did in front of Congress was reiterate the Fed's position on the economy, which was clearly stated on January 25th. He did not provide the market with any news it did not have before, and he did not deviate from the statement of the Fed which was published a month earlier. So, why would a reiteration of a previously published, widely-known position of the Fed be viewed by so-called experts as the "cause" of the termed "flash crash?"

I want to paint a picture for you about the common misconception regarding how news supposedly "moves markets," so you can make a determination as to whether you would be able to make a reasonable trade decision based upon such "news." We will then bring it full circle in order to identify where we currently stand regarding silver.

Fed January 25th Announcement - No QE3 - Silver Rises 10%

After the Fed's statement of January 25th, the silver futures rose strongly from the $31.50 region to the $34.50 region within several days, with the significant amount of that almost 10% rise occurring within the first 24 hours. At the time, many pointed to this Fed statement of the 25th as "causing" this 10% rise in silver, even though it was clear that QE3 was not being contemplated.


Fed February 15th Notes Release - No QE3 - Silver Rises 15%

The notes to the Fed meeting of January 24-25 were released on February 15th for all to read. Even though the public already knew the Fed's position, which was announced on January 25th, silver rose strongly from the $32.75 region to the $37.50 region, another 15% rise within a week.

Bernanke's February 29th Testimony - No QE3 - Silver Plummets 11% In One Day

So, on February 29th, while testifying in front of Congress, Mr. Bernanke once again reiterated the Fed's position, which was already presented on January 25th and February 15th. Now, if one were to engage in the standard linear analysis utilized by almost every economist and market analyst, then you would be buying silver expecting another double digit rise, which many people did. However, silver did the exact opposite - it fell by double digits.

If you may recall, it was at the end of the rise that culminated in our February 28th sell signal, when most market "gurus" were suggesting and entering long positions in the metals. In fact, a day or two before the top on February 29th, we saw some large option positions being initiated in the metals. The strong drop almost immediately thereafter, which has now resulted in a total 19% correction in the silver price, has left investors in this market scratching their heads. Why did the same position statement of the Fed, which "caused" two previous double digit rallies, now cause an almost 20% total correction? Well, let's take it one step further before we answer that question.

Fed April 25th Announcement - No QE3 - Silver Bottomed and Gained 5%?

On the morning of April 25, 2012, silver started the day with a small rise and topped at the $31.00 region early that morning, which we shorted in our Trading Room. Throughout the rest of the morning, silver declined a little over 3%. However, once the Fed issued its announcement in the early afternoon, which was simply a reiteration of the same position it has taken all year, silver seemed to have reversed hard to the upside and, by the next day, was trading even higher than the level from which it fell the prior day. By Friday, within 48 hours after the same statement presented all year by the Fed, silver had gained almost 5% from the lows hit just before the Fed announcement.

Again, this must be making precious metals enthusiasts scratching their heads in disbelief, while trying to figure out if there was a comma that may have been added in the latest statement, from which we may be able to glean a hint of QE3. But, alas, no such hint can been seen from the Fed's statement, which has been rather consistent all year with regard to no QE3.

So, I feel compelled to reiterate a very counter-intuitive position I have stated over and over again with regard to investing: Ignore the news, as it will only lead you astray! Rather, these markets are moved by sentiment, and such movements are patterned.

And, then again, right after QE-Infinity was announced, I reminded everyone to ignore this announcement, and to focus on sentiment:

In fact, just think back to when QE-Infinity was announced. Everyone not only thought, but was 1000% sure, that the metals were about to go parabolic. But, even before the Fed announced QE-Infinity, I made the bold call that, irrespective of what the Fed did, silver will turn back down from the $34.40 level in the futures contract. And, yes, this was based upon my analysis of market sentiment through patterns and Fibonacci mathematics.

Well, silver went to $34.49 (nine cents over my target), and then turned down and has not looked back since. In fact, it was right after that market call back in 2012, that I started warning all the Seeking Alpha readers that $22 was a strong possibility to be seen. And, while many of you scoffed at me and my analysis methodology, how many of you actually started to question what you think you knew about the metals as it has gone completely opposite the manner in which the majority of the market assumed.

So fast forward another year or two, and we now find the metals much lower than the "news-hounds" would have ever fathomed. Yet, these same "analysts" are now touting the end of the bear phase for the metals, simply because QE4 is being suggested. This is not only ignoring fact and history, it is almost insulting to those who know, and are honest about, this market's history. I believe this is nothing more than cheerleading or wishful thinking, and should be completely ignored by anyone who is a serious investor or trader in metals.

Now, I will say something that will shock you. I think there could be a scenario where a QE4 announcement would be a catalyst to the next bull phase to the metals. Yes, you heard me right. But, I say this with a major caveat: this is only assuming that sentiment has completed its bottoming process BEFORE such announcement is made. If it has not, then QE4 will seem just as ineffective for metals as all these others announcements and QE-Infinity have been. But, is that the same as saying that QE4 will "cause" the next bull run? I think not. It will be a final bottoming in sentiment which will cause the change in direction.

As far as where GLD is heading in the near term, I will be honest and say I am not certain. Based upon the close on Friday, I have no imminent downside set ups yet in GLD, and the upside set up is also quite questionable. So, for now, I will not be trading any short term bias until the market provides more clear signals. And, if push came to shove, I would almost have to say the market looks more poised for higher than lower in the immediate future. Yet, without a high probability set-up, I will likely remain on the sidelines until the market provides one. Remember, trading metals is not like the lotto - you don't have to always be "in it to win it."

So, as long as we remain below the 121 region, I am still thinking lower lows will likely be seen sooner rather than later, while a break out over 123 has me looking towards the 130-133 region before we head down to lower lows.

And, as I have been saying for the last week in our Trading Room at Elliottwavetrader.net, I am going to suggest traders wait for a solid downside signal in gold before beginning to set up their next short trade to take us below the 2013 lows. This will avoid being whipsawed, which is what this market has done best to most market participants for the last 3 years. And, should this result in your missing a potential shorter term trade on the downside, I would not fret. The bigger moves over the next few years should be to the upside, which is where your focus should then turn once we see the next lower lows in the metals.

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