For the news hounds amongst you, last week was indeed quite busy. Your head must have been spinning trying to figure out which news story was the "cause" of the spike in gold on Thursday.
You could have chosen the escalation of conflict between Israel and Hamas, or the Ukrainian crisis escalation, or, the unfortunate loss of life due to the terrorist actions downing a Malaysian plane.
But, can we please take a step back, and look at reality rather than emotion? While GLD ripped higher on Thursday, supposedly because of one of these events, if not all these events, what happened the very next day? Well, the Israeli/Hamas situation escalated even further with Israel sending in ground troops. And, what did gold do? Oh, yes, it went down. Did people forget about the Malaysian plane within 24 hours? Did they forget about Ukraine? Maybe the gold investors chose to ignore the news about the Israeli/Hamas further escalation?
So, who is now scratching their heads, trying to make sense of this? Are you attempting to apply "reason" to this perplexing turn of events? Well, I suggest you not bother, because "reason" is not what took gold down, yet again. Rather, it was sentiment.
Now, as many of you who read me regularly know, I will usually peruse the recent articles regarding gold on Seeking Alpha to get the general pulse/sentiment of the majority of the contributors. One article in particular caught my eye, in which the author took the opposite position of most and noted that Indian and Chinese demand will not cause gold to rally. Furthermore, she noted that the Fed's tapering is also bearish for gold. (Like QE was even bullish for gold?) But, her last point was that the Ukrainian situation, along with the Iraq crisis can cause gold to rise. Another author cites the seasonality factors that should cause gold to rise. Yet, that same author notes that demand for gold will remain at record levels (I guess he did not read the first author). And, lastly, there are the usual suspects calling for the collapse of the government/dollar/society, etc., which will, of course, cause an overnight spike to $1,000,000 an ounce.
Amazingly, it is the same script week after week, but without any real accurate directional guidance regarding where the metal is really headed. One event after another is paraded in front of the public, and if the metal moves due to some seemingly proximate event to which they point, then the conclusion is that gold must have moved based upon that event. Well, have you ever heard the saying "correlation does not imply causation?" This means that simply because two variables seem to occur at the same relative time, it does not necessarily imply that one causes the other. Yet, this seems to the most common methodology utilized by investors and analysts alike in the precious metals market.
But, another saying I frequently note is "the definition of insanity is doing the same thing over and over, yet expecting a different result." Now, when one follows a news event which, after its first reporting, seems to "cause" gold to move, yet the same news event later has no effect upon gold, or even sees gold move in the opposite direction, should not the analyst - assuming they are maintaining an open mind and being intellectually honest - come to the conclusion that, while there may have been some correlation in the first instance, there really is no causative relationship? Again, if one is being intellectually honest, then the logical conclusion they should reach is that there is no causative relationship between the event and gold's movement. But, is that what many of you read week after week?
Again, all I ask of each of you is to maintain an open mind when researching this market. You must be intellectually honest when reviewing analysis, as much of the analysis provided in this industry is simply correlative, and not causative. This type of analysis will usually have you positioned in the wrong direction, leaving you scratching your head as to why the market moved in the opposite direction that the exact same news event "caused" before. And, you all know you have been in that position before, so please just be honest with yourself if you really want to make money in this market.
Two weeks ago, I called for market participants to prepare for a whipsaw. In fact, last Sunday, I noted that this whipsaw must begin rather immediately, or it may not occur. I noted that, ideally, "I would be looking for a "scary" drop in the GLD towards the 121-123 region." Well, the market wasted no time. Early Monday morning, we opened to an almost $4 drop in GLD, and it ultimately found support at 124.30. So, we did miss my ideal target by a bit, so far.
But, I am not so certain that this whipsaw has completed yet. In fact, on Thursday, after the market completed its 5+ dollar drop from the recent highs, and literally minutes before the GLD pop, I noted, in a Wave Alert, that should we move through the 126.35 level of resistance, we would be targeting the 127.50 level. Once that level was struck, I warned that unless we were able to move through it, we may expect a drop back towards the 123 region. So, we clearly experienced quite a bit of whipsaw thus far, and it may not be over.
Again, allow me to provide you with my "ideal" situation in GLD. (However, the situation in silver is making me much more skeptical of this potential at this time). But, first, I must provide you with the same warnings, as I have provided over the last several months. The gold market is in a corrective mode. Those usually see the most variable forms of market structures, which require us to be exceptionally nimble and maintain an open mind at all time. While it is good to have a plan, you must recognize quickly when that plan is going to fail, and be able to adjust accordingly.
So, the plan I see going into next week is, as long as we maintain below 127.50, I am still expecting that drop to the 121-123 region. In the "ideal" situation, the market should maintain that region as support, and then rally towards the 130 region into early August.
However, please note that due to the pattern I am seeing in silver, it is warning me that, should the 121 level not be maintained as support, the potential exists that we have begun the run to lower lows. So, if you are going to attempt a long trade after a drop to the 121-123 support region, I would place my stop just under 120. But, personally, I will only be taking a short term long position if I see the appropriate structure develop into that lower region. And, should we see that rally to the 130-133 region, the likelihood I see at this time is that this will be an ideal place to short the market, as it will be the set up for lower lows, potentially taking us below 100 GLD.
Lastly, as I said last week, should I be wrong and the market moves over 140GLD, it would make me consider that the bottom in the GLD has been seen.
Disclosure: The author is long SLV. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I own intermediate term GLD puts.