- India is not a primary driver for gold.
- Does news or sentiment determine price?
- Upcoming weeks' expectations.
Quantitative easing. China. The Pan-Asian gold exchange. Syria. The Ukraine. Have I missed any of the major reasons for the expectation that the metals would rise over the last several years? And, now, the latest and greatest "reason" is the election in India. Everyone now believes that the election will immediately cause demand to skyrocket as the government may roll back the import tariffs on gold.
First, let me just address the logic of that argument, assuming that it would even have an effect upon the price of gold. Since everyone believes it will have an immediate impact upon the price of gold, does that mean that the current import duty will disappear tomorrow? I do not know any government that works that quickly. And, if the Indian populace knows that their cost of gold will be going down in the future, don't they now have an incentive to delay purchases they would have otherwise made right now? So, from a logical perspective, if there is any immediate response to the election results, it would be a drop in current demand for gold purchases, as the Indian populace delays their purchases for the lower expected prices.
Second, it still astonishes me that people actually believe this will cause gold to begin to skyrocket. In truth, this is no different than any of the other "reasons" cited above upon which the masses relied to cause gold to strongly rally. But, I guess this time is different.
Third, this past week, I was introduced to the "Indian Mommy Indicator" by several members on Elliottwavetrader.net whose families are from India. Supposedly, mothers in India are rumored to have a certain knack for knowing where the price of gold is headed, and this indicator reportedly has over 70% accuracy. The consensus of the "Indian Mommy Indicator" is currently pointing down towards the $1,000 level in spot gold, and not up, as many assume.
So, again, after everyone trips over themselves to point out how India is going to cause the new rally to the moon for gold, I still believe it is sentiment which will direct us which way gold is headed.
This past week, I saw a very interesting debate about whether news affects sentiment, or if sentiment causes the news. The common perception is that news affects sentiment. However, I believe the opposite to be true.
The common perception in the market is that the news causes changes in market psychology and fundamentals, which then causes changes in stock prices. But I believe that the correct, more consistently applicable premise is that market psychology and sentiment are the causes of news events and changes in stock prices, whereas fundamentals are purely lagging indicators, and the result of psychology and sentiment changes.
During a negative sentiment trend, the stock market declines, and the news seems to get worse and worse. Once the negative sentiment has run its course, however, and it's time for sentiment to change direction, the general public then becomes subconsciously more positive.
When people become positive about their future, they are willing to take risks. What is the most immediate way that the public can act on this return to positive sentiment? The easiest is to buy stocks. For this reason, we see the stock market lead in the opposite direction before the economy and fundamentals have turned.
This is why R.N. Elliott, whose work led to Elliott wave theory, believed that the stock market is the best barometer of public sentiment. In fact, he went so far as to state that:
[a]t 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.
Let's look at the same change in positive sentiment and what it takes to have an effect on the fundamentals. When the general public's sentiment turns positive, this is the point at which they are willing to take more risks based on their positive feelings about the future. Whereas investors immediately place money to work in the stock market, having an immediate affect upon stock prices, business owners and entrepreneurs seek loans to build or expand a business, which take time to secure. They then place the newly-acquired funds to work in their business by hiring more people or buying additional equipment, and this takes more time. With this new capacity, they are then able to provide more goods and services to the public, and, ultimately, profits and earnings begin to grow - after more time has passed.
When the news of such improved earnings finally hits the market, most market participants seem shocked that the stock starts to move up strongly (even though the stock likely bottomed well before the public takes notice when the investors effectuated their positive sentiment by buying stock), and they simply attribute the stock's rise to the announcement of positive earnings.
There is a significant lag between a positive turn in public sentiment and the resulting change in the fundamentals of a stock or the economy, especially relative to the more immediate stock-buying activity that comes from the sentiment change. This is why fundamentalists can be left holding the bag at the top of a market, when the news and fundamentals look the most attractive, right before the market begins to dive, as sentiment turns in the opposite direction well before the fundamentals. We saw this most clearly at the top of the market for Apple (NASDAQ:AAPL) as well as that for gold.
This lag is a much more plausible reason as to why the stock market is a leading indicator, as opposed to some form of investor omniscience. This also provides a plausible reason as to why earnings lag stock prices, as earnings are the last segment in the chain of positive mood effects on a business growth cycle. It is also why those analysts who attempt to predict stock prices based on earnings fail so miserably. By the time earnings are affected by a change in social mood, the social mood trend has already been negative for some time. And this is why economists fail as well - the social mood has shifted well before they see evidence of it in their "indicators."
This also explains why good news may come out about a stock or a catalyst may be announced to supposedly cause a rise in the metals (eg. QE), yet the market reacts in the exact opposite manner, because sentiment and the "news" are not aligned. And, since we have seen markets react in the opposite manner expected by the masses, it is clear that sentiment is controlling, and not the news. It only seems as though the news may be controlling at times, but that is only when sentiment is aligned with the news.
I mean, how many more times do we have to hear that the "market is just not trading based upon fundamentals at this time?" When will people realize that the market will not trade based upon fundamentals when sentiment is pointing in the opposite direction? So, while some of you may laugh at the thought of the "Indian Mommy Indicator," you may want to re-think your perspective. It may be more reliable than putting money into gold based upon the Indian election.
As for the price action, until this past week, if one would ask what my high confidence direction for the next move in the metals would be, my answer would have been down. However, the action this past week has shaken my conviction. Now, don't get me wrong. I still think we will see lower lows in the metals before this 3+ year correction has completed. However, I am now questioning whether we will head higher before we take that big drop to lower lows.
So, for now, I still am maintaining my immediate bearish posture, at least until the resistance at 126GLD (NYSEARCA:GLD) is taken out. And, even if it does get taken out, I still believe we are going to see lower lows in the metals before this 3+ year correction has completed. But, as long as we remain below 126, the bigger decline can begin at any time. I will also note that, based upon Friday's action, I sent out an alert that I have added a short-term hedge for my short positions on GLD, as I see the probabilities have risen that GLD may take out 126, but until it actually does, it is still set up for a strong decline.
Disclosure: I am long SLV. I also own intermediate term puts on GLD, and short term hedges on those positions over the holiday weekend.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.