The Precious Metals Market Is In Disarray

During the summer of 2011, when gold was rising parabolically, you could find no one who would dare even consider a top for gold that was below $2000.  At the time, the market pundits were quite certain that $2,000 would be well eclipsed by the fall of that year.   And, if one applies linear thinking to a market, it is certainly understandable why most maintained that expectation.  The only problem is that financial markets are not linear beasts, but, rather, they are emotional and non-linear.

It was in August of 2011 that I published my first gold article, which called for a top at $1915.  That target was based upon a 200 year Elliott Wave and Fibonacci mathematics study I conducted.  And, as we now know, the market topped within several dollars of that target.

In a comment to that same article – even before the metals topped – I noted my downside targets of a minimum of 1400, with greater potential for gold to drop to the 700-1000 region.  And, let’s just say that neither of these expectations were taken seriously by the readership of that article at the time.

We are now over 3 years later in time, and most are still stunned by the significant correction we have experienced in metals. But, for those that follow the metals closely, I have one question for you:  How many “bottoms” have been called in this market over the last 3 years?  

Well, I think the answer is that this market has turned just about every bottom-calling analyst on his/her head over the last 3 years.  As for me, there have been two times over the last 3+ years where I was “looking” for a potential bottoming pattern set up, yet, each time, the market invalidated that bottoming potential, which made it clear to me that lower levels were still in order.  So, I am still searching for my first confirmed bottom call – which, amusingly, may then mean it will be my turn to follow in the footsteps of my analyst brethren. But, I have to go with that which my analysis dictates, especially since it has led us quite well over the last 3+ years, whereas many others have failed.

As an illustrative example of how confused this market has been, a noted German gold-stock newsletter writer was quoted by The Gold Report on Oct. 27 that he has been continuing to buy miners "when there is blood in the streets." Yet, just three days later, he publicly noted that he "had to liquidate the whole portfolio."  And, yes, within the next week, the metals bottomed.

As another example, back in the summer when I began shorting metals again, another investment advisor publicly noted his perspective that Elliott Wave analysis does not work — in fact, he called it "nonsense" and "demonic," and he was going to prove it by showing that the metals and miners were about to break out in their next bull market. He felt lower lows were just not going to happen, even though Elliotticians, such as myself, were quite certain we would see lower lows, which we did. Unfortunately, his understanding of Elliott Wave was very superficial, and he suffered for it. Sadly, he and his followers have lost a lot of money - according to his most recent post - and he was forced to go to cash.

And, if you remember, back in November, when we briefly broke the lows of 2013, almost the entire market adopted the perspective noted by this analyst:

"It now seems unlikely that gold will begin a new bull market any time soon."

So, what did the market then do?  Yes, it rallied.  But, when we broke the 2013 low, many lost faith in the metals. Many threw their hands in the air, and suggested it was time to sell.  Yet, I was telling my subscribers that this was an opportune time to buy.  In fact, I wrote articles on MarketWatch and Seeking Alpha imploring those who were contemplating selling their metals positions to reconsider. As I noted in an article posted to Seeking Alpha on November 8th, entitled “Please Do Not Over-react,” I pointed out that “I noted to my subscribers that I was buying long-term positions in silver and various miners this past week.”  This was the first time I went net-long miners and silver in over 3 years.

The question I am sure you are now asking is why do so many highly respected analysts get so badly whipsawed in metals?  Well, when one understands that the metals movement is dictated by emotion and sentiment, it is much easier to develop a trading plan around such movement.  You need a method that tracks sentiment.  So, while one of the analysts noted above was supposedly following Barron Rothchild’s “buy when there is blood in the streets,” and, yet, sold at a loss several days after his “street-blood-buying,” we need to have a better understanding of when to buy which is more specific than just “blood in the streets.”   

Over the last week or two, we have been dealing with a market wherein many were so certain that the November bottom was the final low in this multi-year correction.  Yes, again, a rally brings out the standard bottom calls. Maybe they are right this time.  But, so far, nothing in the move off the lows has suggested that they are.  To me, we have an uncompleted pattern to the downside, followed by a pattern up which is still suggestive of lower lows yet to come.  So, rather than assuming every rally is the start of the next bull market phase, I am still sticking to my guns and expecting those lower lows. But, I am going to be maintaining an open mind to allow the market to prove me wrong.  

From my Elliott Wave perspective, I am looking for a final 5th wave higher in this c-wave in gold and miners.  Once this move completes, then I will be going back into the market on the short side, and fully hedging my newly developed long-term portfolio (right now 50% hedged), as well as taking some speculative short positions.    

Ultimately, I still think that we may get some downside surprises in 2015 before the bull market resurrects. But, you should be focusing on developing your long side positions more so than focusing on the short side for the next decline phase. Just my two cents.

Charts on GDX, GLD & YI (all daily) for Monday February 2nd 2015

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Courtesy of ElliottWaveTrader.net