This past week, metals traders witnessed a momentous event. The silver-pricing method begun during the reign of Queen Victoria well over 100 years ago came to an end. Metal bugs all over the world have been anxiously awaiting this event with baited breath. In fact, I can picture them waiving the silver flag of freedom from roof-tops all across the world.
They believed in their heart of hearts that the silver market has finally been freed from the evil clutches of a small group of traders who have been stealing their money all these years. Now, the price was free to begin its parabolic rise towards the $100+ region they all "know" it really should have been trading at, if not for this cartel.
So, of course, what did silver do in response to being freed from bondage? Did it rally 10%+, as many of these enthusiasts were so certain it would? Did it slingshot skyward once the shackles were removed? No. It dropped 2%.
Sorry, I can't help but chuckle.
Now, we can add to our laundry list of events that were surely to cause a rally in the metals: China, India, QE1, QE2, QE3, Russia, it is supposedly a bullish time of year for metals, and, now, the freedom from the bondage of London price fixing. Am I missing anything? I am sure I am, as there are more reasons as to why metals were supposed to rally than I have hair on my head.
Now, what truly astounds me is that everywhere I look in the financial media, I am hard pressed to find any bearish articles on gold. When we honestly look at where we are in the metals, has there been a confirmed break out? Have we seen any solid evidence that the 3+ year bear cycle has ended? No, we have not. Yet, people that I have never seen write about gold before have now become "experts," and are suggesting that the investing world move into the yellow metal. To me, it simply looks like the crowd is being loaded into the boat to the point of overflow, just before it capsizes.
As we came into 2014, I noted that 2015 can very well turn out to be the year the bulls die. What I meant by this statement was it would likely be the year we see the final capitulation by most of the bullish investors in gold. And, as they are shoving more and more people into this bullish vessel, it sure looks like this prediction will likely turn out to be quite prescient.
The one group that is currently loading the boat for certain is the large speculator group, or as we generally recognize them, the hedge funds. This group has been wrong the most when it comes to correctly discerning the direction of the yellow metal, and they are getting more and more bullish, at least based upon their positioning in the latest commitment of traders report.
On the other side of the coin, the commercial traders - the supposed "smart money" - have upped their bearish bets this past week on a larger degree decline in the metals. While this does not necessarily guarantee that we will see the bigger decline take hold when we open on Sunday night, I can sure tell you that the set-up is there as we speak. And, I will also tell you that seeing a fast 50 point drop in the price of gold next week would not necessarily shock me at all based upon the way it is set up as of the close on Friday. And, as R. N. Elliott stated almost 80 years ago, "[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."
So, as we stand as of the close on Friday, I am very concerned about follow through on my ideal set up (a rally to the 130-133.50 region in the GLD before we see the bigger drop in GLD to lower lows). The current set up on the chart tells me that we may not wait any longer, and the drop can begin as early as Sunday night.
Last week, I prepared you to see a test of the 124 region. Even though many doubted this potential, the low we struck this past week was 124.39. So, for anyone that bought a long position as the market approached the 124 region, due to the current set up in place, I strongly urge you to place your stops at 124.35, and to stop out of the long position should GLD come back down again, as it will not likely stop until it sees the 114/115 region, at a minimum.
In the current set up I see, if the GLD is unable to move through the 127.10 level early next week, and breaks 123.20 first, then all bets are off for further upside, and we will likely see a test of the 114/115 region a lot sooner than most believe, and even before I had ideally wanted.
So, at this point in time, with GLD hovering around the 126 region, some are attempting a trade for another 5-7 points higher, while the downside that is possibly staring them in the face is 20+ points. Unless you are a nimble trader, the risk/reward on this trade is clearly not on your side if you are attempting the long trade at this time, especially as long as we remain below the 127.10 level. But, if you do attempt a long trade in this region, again, your stop must be no lower than 124.35.
If the market was able to prove itself with a strong break out over 127.10, then you can always attempt a long play to the 130+ region. But, please know your own limitations, as there are times when sitting on the sidelines is more preferable than entering a trade with a potentially bad outcome which is foreseeable well before you even enter the trade. This region is only for the most seasoned and skilled of traders, and that clearly does not include those who base their directional gold analysis upon the latest news events. We have seen how that turns out over the last 3 years.
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 also own intermediate term puts on GLD