If you invest or trade in precious metals, you must begin by accepting the fact that most people are wrong about them. Yes, you heard me say it.
These investors almost always base their perspectives on "logical" arguments, which simply cannot foretell where an emotionally based market, such as precious metals, is heading. Think about it . . . do you ever get anywhere attempting a logical argument to someone who is extremely emotional? It is like you are talking two different languages.
Additionally, there is no market which exhibits herding mentality better than the precious metals. Not only does it exhibit such herding mentalities, it does so in absolute extremes, which means that most investors are badly caught on the wrong side of the market when it turns.
People seem to only believe the metals will move in one extreme or the other. For example, those that have been staunchly bullish for years see gold going to $10,000 or even higher, and many believe we should have been there already. But, they do not see the extremism in their perspective. And, the same applies to those who believe gold will go back below $500. They each believe in the "reasonableness" of their perspectives, but, I can assure you that both are extremists.
But, that is inherent in the metals world. The metals, when they move, usually move fast and large. They have periods of consolidation, but their main moves are large percentage moves. This causes people in either camp to extrapolate their perspectives to their extremes, and that is why the perspectives in the metals world are further apart than any other financial market.
Furthermore, those in each camp believe in the impossibility of the potential in which the other camp believes. As a perfect example, back in 2011, before gold topped, I wrote my first market analysis article on metals, wherein I called for a top in gold. Well, clearly, no one believed me, especially when I was calling for a larger degree top when everyone was so sure we were heading over $2,000. But, when I was asked how deep of a drop I potentially foresee, I noted in response to that comment:
Based upon the Elliott Wave Principle, I would expect a very large pullback. In fact, the target for such a pullback will probably be a minimum low of $1,400, it could fall as low as $1000, or even as low as $700. It will depend upon how the decline takes form. But those are very viable targets for gold on the downside. 23 Aug 2011, 05:40 AM
Take note of the date on this post on Seeking Alpha, as it was made even before the gold market topped within a couple of dollars of my topping target within the article. Yes, I was providing specific downside targets even before the market had topped at my topping target. And, here we are over 2 years later, and we have people still not willing to believe that 1000 gold is possible. This really makes me scratch my head.
One of the things that I have been imploring those that read my articles is to open your mind. Do not think that something is impossible in the financial world. Rather, look at the markets through "probability glasses." With the appropriate analysis methodology, you can rule out what the market will most likely not do, and then view the probabilities of what the market will most likely do. If you were taking this open minded perspective in the metals for the last 3 years, then you would have likely made a lot of money on both the long side and the short side of this market.
As unfortunate as it has been for many over the last two years, too many investors and analysts have fallen in love with some fundamental story, to which they firmly clung, despite the market reacting in a contrary manner to their expectations. Yet, they just dug in their heels and maintained how right they were and that the market was wrong. Their famous mantra was "the market will eventually trade based upon the fundamentals." Isn't that a way of saying that "the market is wrong right now?" But, I have news for you: The market was not wrong, they were.
So, rather than admit that they were wrong, they roll out many excuses, and the most common one is that the banksters have caused their losses since they are manipulating the markets. The question I have always asked myself is where were the analysts who were claiming that the market is manipulated when the market was at its high? I mean, if a market is truly manipulated, then they should have also been complaining at the highs. But, did any of us hear a single complaint when gold was spiking through $1,900, seemingly on its way to over $2,000 as they all expected? No. There was not a single voice complaining that the market was manipulated at that time, as they were all enjoying the rush.
But, now, as the market has moved further and further against almost every analyst's expectations when we were at $1,900, these "manipulation" voices have gotten louder and louder. Well, isn't that just simply human nature taking hold? I mean, it is very difficult for someone to admit they are wrong, especially someone who is viewed as a knowledgeable person in the metals world. Isn't it easier to blame those "SOB's who cheated us out of our money," rather than say I may have been wrong. However, this, to me, smacks of intellectual dishonesty.
And, this goes to any type of analysis methodology. There is no analysis methodology that will ever be 100% right all the time. In fact, I know I have been wrong plenty of times in all the markets I analyze. But, the point is your methodology must be able to identify the point at which you are wrong early in the process, and then adapt. But, when you fall in love with a story, and your perspective is either that the market is wrong or someone is manipulating you out of your money, you will never be able to cut your losses to a minimum and then begin to make money on the correct side of the market.
And, allow me to be absolutely honest about the manipulation argument I hear about more and more. Let's even assume the market is manipulated for a moment. Yes, let's buy into the argument of so many that JPMorgan is manipulating the price of the metals every single minute of every single day of every single week. My question to all of you is "so what?" How does that help you make money or are you simply content complaining while you lose money?
When I have analyzed the movements of the metals, it has not mattered to me whether this is true or not. Yet, we still have been able to be on the right side of this market more than 70% of the time, even during this very difficult correction over the last 2 years. So, should your efforts be placed into proving how manipulated the markets are, or in making money in the market? And, if you believe that one cannot make money in this market because it is "manipulated," then there seriously is no hope for you, and the markets will continue to take your money. I think Martin Armstrong said it best when he recently stated that "to these diehards, gold has become a hedge against making money." I am still laughing at that one.
As for the current picture in the metals, I will say that the pattern over the last week did not play out in the ideal way for the bullish case. Not to say that there is still no bullish potential left, as it still can be viewed as potentially bullishly explosive. But, my ideal pattern called for a move directly into the 121-123 region before we see a consolidation/pullback. Unfortunately, the market fell short of its ideal minimum target. Furthermore, the pattern in silver is less than ideal, so it causes me great concerns for any bullish follow through.
So, for now, the short term bullish expectations in the metals market is somewhat questionable in my eyes, as the market has not convincingly provided us with break out evidence. In the upcoming week, I will be watching the 117 support level, as well as the 123 resistance levels in GLD as my guide, along with 21.50 and 19.32 in the silver YI futures. But, as a trader, the current set up is unclear enough to warrant an options strangle, as we will likely see a sizeable move being set up over the next few weeks, which should last for the next month or two. And until I have more clues, I am not willing to place any big money down on a single directional play in short or intermediate term options, other than the strangle strategy. Sometimes, one has a clear and nice set up to trade, and sometimes one does not. This is not one of the times where it is exceptionally clear, and I will be left to calling an audible when approaching the line of scrimmage in the upcoming week.
And, on the larger pattern perspective, I am still of the same perspective that the absolute lows in metals has most likely not yet been seen, as I have no evidence of a clear bottoming pattern in place.
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.
Additional disclosure: I also have an intermediate term options strangle in place