I will be honest and tell you that I was not going to write another article this week, since I will be traveling in the upcoming week.
However, I felt compelled to write this week due to some of the misleading guidance I am seeing in the marketplace about GLD and the direction it will take. And, unfortunately, investors have to be very careful about those that they listen to in the metals arena.
Now, as we know, most folks who analyze the metals believe that news or fundamentals drive the price of gold. While sometimes we see gold seemingly react to a news event and assume that the news is the driver of the direction of gold, I have warned you before about relying on news for the direction of the market:
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.
Now, there is one story in particular that I see paraded before the audience at Seeking Alpha, which is claimed time and again to be the driver of the gold price. However, I must warn you that following such an ill-guided perspective will only hurt you and your investment account.
Too many times I have seen the Russian/Ukrainian issue touted as the latest and greatest reason for gold to skyrocket to new all-time highs. The words that are sometimes used to describe this potential is "get ready for an immediate 20% run in gold." However, I have to also note that those that have used this perspective have been some of the best contrarian indicators for gold over the last several months. In fact, there have been articles published on Seeking Alpha noting how Russia will cause an immediate rally in gold, which have only marked local tops, with $30-$140 declines occurring almost immediately after those articles come out. Although that may seem like a blip to some of you long-term investors, for traders, that is a sizeable money-making move within a few days to a few weeks. And, for a trader to be on the wrong side of that move can be quite painful.
But, it brings me back to the point that, although Russia may be a large country with a sizeable amount of assets, that country has not, nor will it affect the price of gold. Has India or China been able to keep the price of gold up over the last 3 years as many thought they would? So, why would you think that Russia will succeed where others have failed? The ultimate point is that this is simply noise that you should be tuning out.
Secondly, I have written about this in the long-term article I wrote last week, and it is worth repeating over and over: In my humble opinion, GLD should not be used within a long-term investment strategy. Unfortunately, far too many analysts and authors suggest GLD as a long-term investment. However, anyone who makes such a recommendation has clearly not read through the prospectus and or simply does not appreciate the inherent risks in owning the GLD relative to owning physical gold. The GLD and options on the GLD may be used for short-term trading, but not long-term investing. If you would like to hear more detail about why I feel the way I do, please see the public webinar I did on the metals several months ago.
As far as my expectations for the upcoming week, I have to be honest with you that I am still quite torn at this time. Although I will reiterate my expectations for lower lows to likely still be seen, I am wondering if that is going to happen sooner rather than later. Allow me to explain.
For weeks now, I have been suggesting that my ideal set up for those lower lows in GLD would be to first drop to the 121-123 region, and then rally to the 130-133 region before we see the decline to the 95-105 region. This is the whipsaw scenario I have been warning about for the last month, and the market has played out almost to the penny, with this last week's low touching 123.21. And, with this ideal pattern setting up, one would now think that I am surely looking towards the 130+ region right now.
To support that perspective, the most recent Commitment of Traders' report, which represents positions as of Tuesday, shows that the commercial traders covered a significant amount of their short positions in gold, and this was even before the decline we witnessed the rest of the week. And, remember, it is supposedly these commercial traders that are usually on the right side of the market most of the time. Yet, also remember that they were on the wrong side of the market during the 2013 decline. So, this one is a bit of a head scratcher right now.
So, although everything in the "ideal" sense seems to point to a rally towards the 130+ region, I have some very serious concerns about that potential at this time. The patterns that I watch are set up in a very contrarian and bearish perspective right now. Of course, the market can choose to break that bearish set up, but until it does, I have very serious questions about the potential for the market to head to those higher targets, despite the "ideal" scenario of the larger degree pattern I have wanted for a month and the COT report all standing in alignment for higher levels to be seen.
As of the end of the day on Friday, it looked like the GLD had one more potential pop being set up towards the 125-125.50 region. However, if the market should be unable to take out that region of resistance, it has a very bearish pattern set up in place to take it down to the 121 region, and even the 115.75 region. And, this is why I am torn at this time.
So, there are times that one should be jumping in with two feet and, as some in my trading room at elliottwavetrader.net say, "trade it all." But, clearly, being a trader, one has to recognize when to trade, and when not to trade. For most people at this time, I am going to suggest to "not trade" for the upside until at least the 125.50 level is broken to the upside, with follow through over the 126.15 level. At that point, I can have greater assurance of us targeting the 130-133 region.
But, with the current bearish set up in place below 125.50, the potential exists for the entire market, even the commercial traders, to be on the wrong side of this decline, should we break the cited support regions. So, the upcoming week is a very important one, indeed.
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 puts in GLD.