The diversity of opinion is no greater anywhere in the investment community than in the world of precious metals. And, yes, everyone and their mother has at least one opinion. But, the significant opposing positions are what makes the metals market one of the most heated, and interesting markets I have ever analyzed.
The multiple opinions run the gamut between manipulation theorists, to "paper-haters," to fundamentalists, to technicians, to "guru-followers." While no one has been able to correctly determine each and every weekly move of the metals over these last three years of crazy market action, the only ones who have been able to identify the majority of the moves have been the technicians. So, let's try to understand the most popular perspectives and the weaknesses within each.
The manipulation theorists firmly believe that there are people standing behind the curtain and manipulating each and every action and reaction in the metals market. They point to "facts" that have been publicized by various law suits to support their position, and simply lament that the metals have not gone higher, but are dropping instead. They "feel" that anyone that denies this perspective is utterly foolish, and should be completely discounted, as they "obviously" don't understand the market.
The basic problem I have with this group is that the core of their perspective is that the metals are only supposed to rise and not drop or correct, and the only reason it drops is because of the manipulators protecting their short positions. So, when it does drop, it is being "manipulated," but when it rises, then it is doing what it is supposed to be doing. Does this mean the manipulators were not in control of the markets when the metals were soaring to their all-time highs, supposedly against the manipulators primary positions? Or, do the manipulators only control it when it goes down? Can anyone see the "logic" in this perspective? This group does not have a reasonable approach to a two-way market, and there is no market on the planet that is not a two-way market.
Now, the fundamentalists bring an entirely different perspective. They feel that the buying of China and India will trump all other factors, and cause metals to rally. In fact, almost all fundamentalists did not see the top coming in 2011, and continually proclaimed that the "fundamentals for gold are stronger than ever." Almost all have continued this same mantra even after gold's initial fall from grace in 2011, and still expected a big positive year for 2012. What is worse, the mantra "fundamentals for gold are stronger than ever" was in every fundamentalist article written in 2011, 2012, 2013, and 2014. But, with such fundamentals, mostly of China and India demand, stronger and stronger, the metals continually declined.
What the fundamentalists don't acknowledge is that there is a stronger driver for metals than fundamentals. And, that is sentiment. Sentiment peaked in 2011, and, we even calculated the topping region where sentiment would top, as well as how deep the correction would take us before it really even began. On August 22, 2011, I published my first metals article here on Seeking Alpha stating:
" . . . since we are most probably in the final stages of this parabolic fifth wave "blow-off-top," I would seriously consider anything approaching the $1,915 level to be a potential target for a top at this time."
If you remember, gold topped at $1,923 (ok, so I was off by $8 in the heart of a parabolic move). I followed that up with an article on August 25, 2011 (a prediction made almost 3 years ago) noting how deep the potential correction can take us:
"if it becomes clear that GLD has hit a multi-year top and will not find support at any of those levels (which would be based upon other EW principles and guidelines regarding how the wave structure down takes shape), then it is entirely possible that GLD will not find support until at least the GLD 112 level"
This was written 3 years before we approached the target region noted in the August 2011 articles. This should provide some evidence that fundamentals alone will not provide you all the answers in the metals arena. While a fundamental news story may act as a trigger for a move in the metals, it does not provide a lasting effect upon the market unless it is aligned with sentiment, as sentiment is the controlling factor in the metals market. And, as I have noted many times in past articles, sentiment movements are patterned and can often be tracked.
This now takes me to the "guru-followers." There are many so called fundamental gurus who most followed as the market was skyrocketing. Names like Sprott, Embry, Sinclair, etc. come to mind. Many look to these gentleman as being "in-the-know" when it comes to metals, especially since they supposedly became wealthy by investing in metals. So, of course, many of you are thinking that they will "eventually" be right, since they really know the industry better than anyone else. Well, if that were really the case, why were they, in unison, so uber-bullish in 2011, and continued to be uber-bullish through 2012, 2013 and 2014? In fact, I have lost track of how many supposed bottoms calls I have seen from these "gurus."
I mean, how can you justify being uber-bullish an asset while it loses 60% of its value during your claim of uber-bullishness? And, if you are going to tell me it is because they have their eye on the "bigger-picture," then you are imply kidding yourself. As I said last two weeks ago, "[i]t must be nice to live in a world where you lose more than half your assets, still be able to claim you are right, and have the masses agree." It really confirms that those that cling to such "reasoning" have lost all sense of objectivity, as they have so fallen in love with the "story." They have lost focus of their primary reason for being in the metals market; preserving their assets. And there is no one on the face of this earth that will be able to appropriately explain to me how you lose 60% of your asset value and still claiming you are "preserving your assets."
Then there are the "paper-haters." They feel that the market has created so much paper representation of the actual physical metal that the trading of the paper controls the direction of the market. While there are certain issues I do share with this group, their logic is also flawed. They, too, assume that if there was no paper representation in the metals market, the market would only rise. And, it is due to the selling of the paper that the metals have fallen. Again, has there ever been a market in the world that has only risen and never declined? So, I have to call this group out as well for their lack of logical basis in their perspective.
However, I will admit that there is a potential house of cards that could implode this segment of the market, in that not all the "representative" paper is backed by actual physical metals. This "fractional" metals market is no different than the fractional banking system we have today, which, they also feel will ultimately implode. And, again, I don't disagree. The question is when. The answer, believe it or not, is sentiment related. These two systems have one main thing in common which keeps them afloat: TRUST. When that public trust runs out, and the public will only want to hold physical cash or physical metals, the jig will be up. But, we are clearly not there just yet. And, truthfully, it is quite possible that we may not be that far away from that point in the metals market. It may be what fuels the next parabolic rally in the metals.
So, now that we have gone through all the arguments as to why many are still bullish gold, please allow me to focus on what is the driving force behind the metals; sentiment.
This past week, I have seen further articles across many financial web-sites that are strident in their perspectives that the lows are in for the metals, and we are surely going higher. In fact, one contributor on Seeking Alpha called me foolish for believing otherwise.
And, I have also been receiving quite a number of emails from readers here suggesting that I am "crazy," "foolish," and "clueless," along with some colorful expletives. To me, this means that the next drop in the metals, which I expect to take us well below the 2013 lows, will likely crush many long time bulls, if this is the emotion they are experiencing at this time. Often, we see such outward exhibitions of emotions around turning points. In fact, we see it in my Trading Room all the time. When the market comes to an inflection point, emotions become heightened. So, I think we are approaching an inflection point in the metals.
But, as many of you that have followed me for some time know that I do not care which way the metals are going, I simply strive to be on the correct side of that move. And, I think we have done quite well in that regard. So, when I look at the amount of bullishness still within the market, it makes it hard for me to believe that we have truly bottomed in a significant way.
As for the action over the past week, it does seem as though the move up was the weakest yet in this corrective rally off the 123 region for the GLD. This usually supports the perspective of this being a corrective rally which is about to come to an end soon. Can it last another week? Maybe. But, it is not something for which I would want to be on the long side in any meaningful way in the short term, as long as we remain below 131.50.
Therefore, nothing has really changed from last week, other than we have moved into the ideal target region that I laid out weeks ago for this corrective rally, at least as I see it, and it seems that I stand within a very extreme minority in that perspective. But, my comments from last week still are quite applicable:
In the upcoming week, I think we will likely be developing a topping pattern of some sort. If it is the conclusion of this corrective rally, or just the first leg of 2 movements up in this corrective rally is yet to be determined. But, as long as 131.50 is maintained as resistance in the GLD, I am focusing on an impending large downside move. The support level to watch is 123-123.60 region. A break down below that region, which is seen on very high and strong selling volume means we have begun the bigger decline, with the next target being the 2013 lows, on our way to lower lows in the metals arena.
But, if we are to exceed the 131.50 region, then I will potentially be looking for another rally taking us to the 140-143 region before we begin that bigger downside move. But, I see this potential as a much lower probability at this time. Yet, we have to be prepared to know what to do in the event that our primary perspective is ultimately proven to be incorrect.
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 have intermediate term puts on both SLV and GLD at this time.