Are Gold And Silver Investors Really That Foolish?

Includes: GLD, SLV
by: Avi Gilburt

I think we all need to get more realistic when we look at the common reasons that are proposed in the media regarding what moves the metals market.

At the end of 2012, when silver was just over the 32 level, I warned all readers that the metals would be topping when the silver futures hit the 34.40 level. I wrote this days before the Fed announced QE-Infinity. So, when the Fed later made its announcement of QE-Infinity, everyone thought that "crazy Avi" and his hocus-pocus-Elliott-Wave is going to be proven wrong. Everyone had no doubt at that time that QE was going to propel metals to the moon.

Well, we all know that the futures topped at 34.49, and look at where silver headed from that region. Yes, it went even lower than I had expected at the time, as my expectation was the 22 region.

So, I hope it is very clear to all readers that the metals were not positively impacted by QE, despite the commonly pervasive "group-think" to the contrary. In fact, the common understanding of what moves the metals should have been shaken to its core. But, does anyone really discuss this? No. It is swept under the rug, and no one has come up with any good explanation for it other than it must be "manipulation," because these analysts certainly could not be wrong.

But, as I have been saying for years, it is not news or some exogenous event that will determine the trend for the metals. Rather, it is the internal sentiment of the market participants that determines the direction of the main trend, which is unaffected by exogenous events. While a news item may trigger a move for which the market is set up within that trend or pattern, it will not change the trend, and the trend was pointing down in silver, no matter what the news was going to be. This should now be abundantly clear in the silver market for all those honest enough to recognize it.

So, of late, I am simply astounded by what I read various "reasons" in the metals world that will cause the metals to move. People are attempting to proffer the argument that the Fed is really not going to pull-back on its bond buying and that is what is making silver rise with a parabolic trajectory. Really? So, the metals tanked in the face of QE-Infinity, but the fact that the Fed "may" not taper QE is a reason for the metals to rally strongly? All I can say is "wow."

In fact, I have even seen half a dozen "analysts" proudly note that "all of the fundamentals that supported the precious metals trade on the long side in 2011 are still there." I almost gagged when I read that, and really could not believe that someone actually had the gall to make such a comment after silver has lost 64% of its value from the highs. 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 64% loss in value.

And, now, when the metals are in a short term uptrend, many have dusted off the same old stories, such that we are heading into the Indian wedding season, demand in China is strong, etc.

Now that silver is an uptrend, well, of course it must be because the Fed is probably not going to taper, or India, or China, etc. Who cares that none of these "reasons" did not help the metals one iota over the last two years, yet, now they will!? Yes, I completely understand that "logic." NOT!

The bigger 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 two years? It is about time that all of you that have been severely burned following such "reasoning" 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.

So, I will get off my soap box now, and let's see where we stand in the metals market. Some of you have requested that I provide a snippet into my Elliott Wave perspective, so I will give you some insight into my technical analysis at this time.

When I look at the daily silver chart, and even compare it to the June-September rally last year, I can see silver heading much higher, and potentially still as high as the 26-27 region. However, when I look at the smaller time frame of the 144 minute chart, and especially in GLD, I am seeing a top that can potentially occur earlier than expected.

For this reason, I am going to suggest those that are trading this rally with shorter term options take their profits on the lower targets I present in the analysis below. There is no reason to let those profits go to waste. So, yes, I am suggesting to many of you to play this move up a bit safer at this time.

When I look at the GLD chart, the pattern seems to indicate that we are in the 5th wave of the wave iii of the c-wave. This means that this c-wave may not extend as high as we had initially expected (the 142 region), and we may actually top in the GLD 138.50 region, which is where a=c. In fact, the 3rd wave of wave iii did not even reach the 1.00 extension of the c-wave Fibonacci Pinball level, which tells me that gold is not quite as strong as many believe. And, as for support, any break down now below 130 (the top of wave i of the c-wave) opens the door to a much larger decline which can still target at least the 112 region.

As for silver, as I posted in the Trading Room at on Friday, this current pattern seems to be targeting the 24.55-24.76 region. The question is whether this will represent the top of wave iii, or all of this corrective rally. When I look at the daily technicals, there are no signs of a market top at this time. The RSI and the Slow Stochastics are embedded, and the MACD is still pointing up.

In fact, if we compare the RSI to that of the June-September rally last year, we almost doubled the amount of rally that has been seen thus far in that time frame. This would still keep us on target to hit the 26-27 region. However, due the smaller time frame pattern, I am going to suggest exiting your short term trading long positions as we move into the 24.55-24.76 region (assuming no extensions become evident into that region), and allow the market to prove to us that it is wants to consolidate in a multiple-day wave iv before re-entering for a wave v rally. A breakdown below the 22.20 level would indicate to me that the trap door may be opening and having us target the 17.75 level next.

What is most interesting is that GLD does not present nearly as strong as silver. The negative divergences we are seeing in GLD relative to the a-wave (which are not seen in silver) are actually quite surprising, and explains why gold is not performing as well as silver on a relative basis. In fact, silver can continue to outperform GLD, which may be why I can see GLD topping well below a potential top in silver, from a relative perspective.

And, as you may recall, many of you were shocked when I announced at the end of June that I was no longer hedged in silver on my LEAPS. At this time, I will sell my shorter term calls and begin to layer in hedges as we move into the 24.55-24.76 region (assuming we do not see any clear extensions developing). But, at the same time, if we see an adequate wave iv, I will then re-enter shorter time frame longs for a wave v - which can still take us to the 26-27 region, and begin to add further hedges after the 3rd wave of that wave v begins to complete, since silver is known for its double tops.

Disclosure: I am long SLV. 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.