Confessions Of A Gold Analyst: A Long-Term Investor (Not Analyst) Perspective

My first public market call in the metals complex was made back in 2011, at which time I was looking for a top in the gold market at $1,915.  While it came quite close to the actual top struck in the market ($1,921), many thought me to be less than credible in publishing such an article when the rest of the market was so certain that we would exceed $2,000 imminently.

But, what was not written that article was my suggestion to those that were following me to sell their gold once we crossed the $1,900 threshold.  You see, there is a difference between analyzing a market and how one should effectuate that analysis as an investor.  Allow me to explain.

Even before the market topped, I noted two potential targets for the downside in gold.  The higher target was struck in 2012, with the lower one being between $700-1,000, but with an the ideal 98-105GLD target region, with the potential to drop as low as 75 in GLD.  Once that higher target was struck in 2012, I was watching to see if we would develop a confirmation of a bottom, at which time I would buy all pullbacks.  However, when no confirmation was seen, I started focusing upon my secondary target, which was much lower. 

But, some of you that have read my articles of late have been surprised or even confused as to why I was buying at the last lows in metals and miners even though I expect one more lower low.  So, I think it is time to explain the difference between being an analyst and an investor, and how I apply my analysis to my long term investment plan. 

First, we must begin with an understanding that markets are not linear, which ultimately means that there can be no analysis which is 100% guaranteed.  Rather, as analysts, we deal in probabilities, so when I am looking for a lower low in the market, my expectation is that I maintain a 70-80% probability that a lower low will be seen.  

Second, as an investor, my goal is to buy low and sell high.  My expectation should not be that I will be able to buy the EXACT low, nor should I expect to be able to sell at the EXACT high. While this does occur often enough, it is not something upon which a long term investor should place 100% focus or reliance.  For this reason, I suggested to those that followed my analysis to sell their gold once we moved through the $1,900 threshold, as I am generally more conservative when it comes to my investing, but a bit more aggressive when it comes to my trading. 

Third, for those that understand Elliott Wave analysis, you know that an impulsive structure has 5 waves and a corrective structure has 3 waves.  Furthermore, you understand that the great majority of corrective structures end with their 3rd wave (c-wave) actually being a 5 wave structure, while a minority of those 3rd waves complete as a 3 wave structure (w-x-y pattern).

Fourth, one must be able to utilize their analysis methodology to identify a bottoming target.  In my case, I utilize Elliott Wave analysis and Fibonacci mathematics to identify a high probability (not guaranteed) target region, at which point we could see a reversal of the current trend.   This is how I came up with my $1,915 target on the top side, and how I came up with my downside targets as well.

When we take all four of these factors together, it should help one formulate a plan as a long term investor who is looking to buy into a potential market bottom.  We have to understand that a 5th wave lower low (within the 3rd wave down) is not guaranteed and has a 70-80% probability. One must take into consideration that there is still a 30% probability that the final corrective structure can complete with only 3 waves into the low, especially when that 3rd wave strikes the calculated target region.  

For this reason, my more conservative investing plan has me buying the bottom of a 3rd wave, especially when that 3rd wave bottom strikes my target.  Of course, I still maintain some “dry powder” for the lower low which my analysis expects.  Furthermore, if the analysis is correct, then the rally off that 3rd wave bottom will only be corrective in nature, thereby providing initial confirmation that a lower low will be seen. And, near the high of the corrective rally structure, one can always hedge their long positions for the drop to the lower low.

So, how has this worked in practice?  Well, the lows we struck over the last few months “counted” as the 3rd wave in the final 5 wave structure into the lower lows we have expected.  Moreover, all segments of this complex struck the top of the long term target regions I calculated several years ago through our Elliott Wave analysis and Fibonacci mathematical calculations. So, my own personal investing plan had me buying into those lows, which I announced in my Trading Room as those lows were being struck in real time.  And, now, we are seeing confirmation that some of the miners we have bought have a solid bottom in place already. 

But, remember, while we bought at the last lows in the metals, we are still looking for lower lows.  So, the remaining “dry powder” will be deployed should we see one more drop into our target region.  And, as the downside structure takes form, we will be able to have a better idea as to whether we will strike our ideal targets, or if the market has set up to provide us with that overly emotional deeper drop I had considered years ago.

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Avi Gilburt is a widely followed Elliott Wave technical analyst and author of ElliottWaveTrader.net (www.elliottwavetrader.net), a live Trading Room featuring his intraday market analysis (including emini S&P 500, metals, oil, USD & VXX), interactive member-analyst forum, and detailed library of Elliott Wave education.