- Russian action is not driving metals pricing.
- Sentiment controls the market.
- Targets for metals.
In one word: NO. In fact, the title even presupposes a common fallacy accepted by the majority of the market. If you ask most people why the metals have rallied of late, their answer is invariably "Russia, of course." Unfortunately, those people are not burdened by the actual facts.
Gold started rallying two months before Russia ever became an issue. And, in truth, the "Russia-effect" only lasted a day or two. But, yet, the common perception is that the metals rallied because of Russia. This is just the latest example of how most market participants really are fooled by the media and most analysts. And, the exact same thing happened with the Syrian issue. But, most have very short memories, and are willing to accept anything that "sounds reasonable," without engaging in any independent thought as to how "reasonable" or even factual it really is.
Until now, there has been no good "reason" as to why the metals have been rallying since January. So, when a good reason belatedly arises in the news, of course, everyone is quick to point to it as the cause of the metals rally. But, it still does not explain why the rally started two months before the cited "reason." Maybe purchasers of metals are clairvoyant?? I think not.
Once again, it leads me back to the true cause of the metal's movements: sentiment. In fact, the manner in which we analyze sentiment saw the pop in gold coming before Russia even hit the news wires. Now, I know many of you may not believe that we are able to discern such movements by analyzing market sentiment, but please allow me to give you an example.
At the end of the day on Friday, February 28th, I entered a short-term GLD long trade and using calls for the following week. It was meant to be a speculative, very short-term trade (which I lovingly refer to as a "lotto trade"), for a quick pop that I was expecting in gold into early the following week. Well, as we now know, gold spiked up on Monday, supposedly on the news of the Russian incursion.
So, of course, some of you may say that this was purely luck, and there is no way an analysis of sentiment can direct one to make such a trade. But, here is the kicker. I sold that trade on Monday. And, as we now know, the next day, the Russian issue subsided and gold immediately dropped.
Now, I will never claim to know what the news or catalyst will be before it happens. All I can tell you is when the market sentiment is set up for such a catalyst to cause a specific move. And, many times, the market moves without the news catalyst anyway.
So, when the market will move in the direction dictated by the market sentiment, whether there is news to cause that move or not, it tells me that sentiment is always in control of the market. I do not have to wait until the fundamentals "eventually" control the market, as many have been claiming for the last three years. Sentiment ALWAYS controls the market. And, if sentiment is not set up to move the market in a certain direction, then the fundamentals will simply be waiting on the sidelines until sentiment is ready. Again, it is because sentiment is the real driver of the metals market. And, whether we will be proven right or wrong, our sentiment analysis still believes that lower lows will be seen in the metals.
From an anecdotal sentiment perspective, it does seem as though almost everyone has now moved into the "bull camp" in the metals. As I do my weekly perusal of the articles recently written on Seeking Alpha and other sites, I notice how bullish almost all the analysts have become. Well, there is one standout who is maintaining his bearish outlook, and I have to give him credit. Robert Wagner - no, not the actor - has been calling for lower gold prices. While he did not foresee this rise in the metals, he is still focused on lower lows to be seen.
While doing my weekly perusal, one quote I saw really captured my eye, and made me do a double take to make sure I read it correctly:
"Instead of a multi-year downtrend, with disinvestment putting pressure on prices over time, many of the variables that drive gold prices (lower in 2013) have already reset to an extent," says Nomura, boosting its gold target to $1,335 this year."
And, this is where I did a double take. Isn't gold now trading at 1339? And, if it is rising, would not the "variables that drive gold prices lower" have clearly subsided? Again, this is linear analysis at its best, and it only plays catch up. Furthermore, it never prepares anyone to know where the trend may change. That is why most of them have been caught on the wrong side of this market for the last three years of terrible whipsaw.
At this time, we are seeing two different stories in the metals. While GLD has not confirmed that a top is in place yet, silver can potentially be viewed with a top in place. However, I am not going to be so quick to consider the upside completed just yet in either metal.
While I will not go into the details of the Elliott Wave analysis here, as it is beyond the scope of what I do on Seeking Alpha and somewhat complex to Elliott Wave novices, I can say that as long as silver futures hold the 20.40 level (which I can even extend down to the 19.90 level as the lower level support I am willing to accept for this larger uptrend), and as long as GLD holds over 126, I can see both metals attempting one more rally before this corrective rally completes and the downtrend resumes.
Assuming support is maintained, my immediate target for GLD is 131.50, and then 133.50. In silver, assuming we can move through the 21.65 level (which is the trigger level to see higher levels), then it should take us back to the old initial target of 22.50-23. While silver can still target the 24-25 region, I am not certain as of yet that I will be looking for that target, and will wait to see how the market develops before I make that decision.
I would like to digress for a moment to make an important point in how to read my analysis. Many of you point to how wrong I was two years ago, as I was looking for an upside break out to new highs. Clearly, you read the title of my articles, without going into the specific detail. But, each and every one of those articles gave you a specific break out level to trigger the perspective that a bottom is in and we are on our way to new highs. Not once did that trigger ever fulfill, and the market continued to slide lower until it broke the potential bullish pattern and had me begin to focus on the 22 region and potentially lower. The reason I bring this up now is that I want you to be very cognizant of the 21.65 bullish trigger this time, and not assume I am simply looking for new highs in the silver futures, as this is a highly speculative long trade in the face of another potential decline to lower lows.
With all this being said, I want to reiterate my strong suggestion of caution for those that want to play further upside at this time. I cannot stress enough how 126 in GLD and 19.90 in silver must hold for us to be able to see those higher highs, before we begin our next move down to lower lows. But, in the intermediate term, I am still looking for those lower lows. While the market may prove me wrong in expecting those lower lows, there is nothing in the current market action to suggest that it will.
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: Bought initial position of intermediate term puts at prior highs.