Many have been quite surprised by the demand for gold in India of late. In fact, gold and silver imports into India in April more than doubled the amount from a year earlier. So, why did gold fall this past week?
Well, in very simple terms, sentiment is not yet ripe for the rally to take hold, but we are getting much, much closer. However, I am still unconvinced that it will be more than a corrective rally, as my primary expectation of a bottom is sometime in the summer or fall.
As I discussed in my most recent silver article, it seems that many are now coming to the realization that QE will not drive metals prices higher. In my silver article, I pointed towards John Wagner's recent gold article noting the same. But I also explained why I feel that most market participants inappropriately look towards the fundamental factors they deem important for gold to rise, but without the appropriate sentiment structure being in place, it will all be meaningless.
Ultimately, most market participants view markets within the Newtonian framework. Until the times of R.N. Elliott, the world applied the Newtonian laws of physics as the primary analysis tool for the financial markets. Basically, these laws provide that movement in the market was caused by outside forces.
Newton formulated his laws of external causality into his three laws of motion: 1 - a body at rest remains at rest unless acted upon by an external force; 2 - a body in motion remains in motion in a straight line unless acted upon by an external force; and 3 - for every action, there is an equal and opposite reaction.
So, the common belief was, and, unfortunately still is, that a stock or commodity will remain in motion in a straight line, unless something acts upon it, like news or earnings, to change its direction.
However, as Einstein stated: "During the second half of the nineteenth century new and revolutionary ideas were introduced into physics; they opened the way to a new philosophical view, differing from the mechanical one."
Even though physics has moved away from the Newtonian mechanical viewpoint, sadly, our financial market analysis has not. In fact, how often do you see good earnings come out for a stock, yet the stock tanks? Well, we justify it by saying that they "sold the news." But, it then leaves you with the reasonable question as to how do you know if good news will cause a good reaction in a stock or a "sell the news" event?
As we all know, most market participants are looking for the next piece of news that is supposedly going to move the market. So, when they hear a positive news event being reported, they automatically assume that the market will respond positively. But, we have all seen markets sell off on positive news. And it has had many market participants scratching their heads in disbelief, and, it unfortunately causes losses in their trading accounts.
In fact, I can no longer count how many times I have heard fundamental analysts claiming that a market rally or decline just does not make sense or is wrong based upon their fundamental analysis. I mean, how many times have we heard analysts state that the market is just not trading based upon fundamentals at this time.
Just the other day, I was listening to a fundamental analyst on CNBC who was actually claiming that, from a fundamental perspective, the transports market was wrong when it has been rallying of late.
But, it never occurs to such analysts that maybe their analysis methodology is wrong. Maybe the markets don't move based upon fundamentals. Think about it, does it really makes sense to use fundamentals to determine market movements if many of these analysts admit that markets don't always trade on the fundamentals? Could there be something else moving markets ALL the time?
As Elliott put it, "In the dark ages, the world was supposed to be flat. We persist in perpetuating similar delusions."
Elliott urged that we move away from such misdirected analysis and view that external events affect the market only insofar as they are interpreted by the market participants. Such interpretation is guided by the prevalent social mood internalized by the investor community as a whole.
Therefore, the important factor to understand is not the social event itself, such as the news, fundamentals, or the earnings, but rather the underlying social mood which will provide the "spin" to an understanding of that external event or information.
This is exactly how QE should be viewed. When social mood or sentiment was positive, then the gold market rallied on QE infusions. However, after the market peaked in August of 2011, and sentiment turned negative, and has remained in a negative downtrend; no amount of QE - especially the current QE-Infinity - has been able to change the direction of gold.
This brings me to another point. Many believe that news will cause changes in sentiment. Rather, this is looking at the causation chain backwards. It is the prevalent social mood which causes men to act as they do, which then results in reported news events based upon those actions. So, claiming that those news events will then cause changes in sentiment is circular logic, and clearly wrong. Rather, when sentiment is ready for change in trend, a news event may be the catalyst for the public's action based upon the trend having already changed, but the news itself did not cause the trend change. This is why Elliott said "At best, news is the tardy recognition of forces that have already been at work for some time and is startling only to those unaware of the trend."
So, for those that are looking at the current state of the gold market and thinking that there is simply nothing that is going to change this downward spiral, I will caution you that this downward spiral is just about to end and turn very hard to the upside for a counter-trend rally. But, my primary belief is that it will only be a counter-trend rally, and will likely provide us with one more short set up before this market does turn intermediate term bullish once again.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GLD over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.