Price Action Over the Prior Week
There was not much price action to discuss from the prior week, as the market simply consolidated sideways the entire week.
Anecdotal and Other Sentiment Indications
Everyone who comes to Seeking Alpha is seeking exactly that - alpha. But, while everyone is seeking alpha, how does one know how to recognize alpha in the metals complex?
You see, much is written about the metals week after week. And, week after week, most of what is written deals with the latest news events and analysts' attempt to relate those news events to market action seen in the metals complex. This is the most commonly accepted and utilized method of analysis in the marketplace.
But, one must reasonably question whether the predominant method commonly used actually provides "alpha?" I mean, is not the entire market focused on the same factors? If so, how is this able to provide "alpha?" Or, is "alpha" derived by viewing the market in a different manner than the rest of the market, which can then provide the edge you seek?
The analysis perspective I have written about on Seeking Alpha for the last 5 years is not based upon the same premise as most. While most will view the latest news events as the proximate cause of the metals move, I view social mood as both the cause of the price movements in the market and often the cause of the latest news events as well. And, most importantly, those that followed my analysis over the last 5 years were able to exit the market at the highs in 2011, and then re-enter at the lows struck at the end of 2015 and early 2016.
So, while I recognize that news events can be a timing catalyst for price moves within my analysis method, the direction of the move is determined by market sentiment and not by the substance of the news itself. This also explains why we sometimes see price moving in the opposite direction suggested by the substance of the underlying news event. This is precisely why the reaction to a news event is far more important than the substance of the news event, as the reaction evidences the market sentiment, whereas the substance of the news is appropriately viewed as relatively unimportant.
Moreover, when the metals move and there are no news events to which analysts can point as the clear "cause" of the move from their perspective, we often see them stretch the logic of their premise to fit any news event occurring that day to suggest it was the cause of the metals move. And, these are the glaring moments which evidence the true lack of intellectual honesty in utilizing this analysis perspective.
In fact, and even worse than where there is no news to which they can point to support a price move, we have seen analysts claim the exact opposite factors as having caused the same directional movements in the market. For example, one month, we can see the metals drop after a bad jobs report, which has led to the claim "bad jobs data causes the metals to drop." A month later, we can see the metals drop after a good jobs report, which has led to the claim "good jobs data causes metals to drop." And, you all know you have seen these types of attempts at causative links over the years, and it has had you scratching your head, yet you were generally willing to accept it.
Let me show you some recent examples of such type of "causation" claims, and show you why attempting to develop such causative links do not make sense if you are "seeking alpha" to identify the price direction for the metals.
Last week, I read so many articles by so many different people that suggested that the market was manipulated to the downside again since China was on "holiday." And, they were so certain that once they came back from holiday, the Chinese investors would bring gold right back up. Well, are you as shocked as I am that this did not happen? Just chalk this up to yet another "story" in the long line of so many others in this complex that sounds good, but has no true value to investors because there really was no causative link to the Chinese market. Clearly, this is not the "alpha" we seek.
Then we have the usual claims that a stock market crash will propel gold skyward. One has to question where these people have been in 2016. Was there truly an inverted causative link between the direction of the metals and the stock market? Have they not realized that the stock market and gold have traded in general lockstep for all of 2016? Clearly, they are not burdened by the facts, and maintain the old fallacies which have been inappropriately propagated for too long about the relationship between gold and the stock market. One should be asking them if they have shorted this gold rally in 2016 due to the rally in the stock market, based upon their "thesis." Again, this does not lead us to the "alpha" we seek.
Oh, and let's not forget that it was the dollar rally that supposedly "caused" gold to drop, as many have also claimed. But, wait a second. Didn't gold and the dollar rally together starting at the end of June through July, with both hitting their tops within days of each other?
Huh? That can't be right? Oh, yes my friends, it is. Gold hit its double top on August 3rd, whereas the dollar hit its high the week before on July 27th. And, guess what? They both even declined together during the month of August.
So, how do these "correlation theorists" deal with the fact that both gold and the dollar rallied together in June and July, and then dropped together during the month of August? I will tell you how - with SILENCE.
They remain silent about the market action between June and August because it is so much easier to present a commonly accepted fallacy that a negative correlation with the USD is akin to causation for the metals drop than to deal with the truth. And, of course, everyone will accept this as the "cause" of the metals drop because there is no independent, intellectually honest thought left in this market. But, if this "logic" was even remotely correct, then why did the metals rally with the USD during June and July, and fall with the USD in August?
Picking and choosing the time frames you want and ignoring others that do not support your false premise may provide a convenient "reason" for gold's decline, but it is lazy and intellectually dishonest analysis, if one can even call it analysis. But, I guess that is also why those proffering this type of "analysis" have been the best contrarian indicators in this market for months.
Let's even take it one step further, and blindly (and wrongly) assume that the direction of the dollar determines the direction of the metals. The next problem is that none of the analysts that predict based upon dollar direction are able to accurately predict the direction of the dollar any better than they have done on the metals. While they can, only after the fact (and, again, wrongly), claim that the metals went down because the dollar went up, have they ever proven to be able to identify these movements before they happen?
Effectively, it means analysts have to correctly forecast the direction of their indicator (the USD), and then "hope" that the subject asset (GOLD) will adhere to the seeming correlation with the indicator. And, even in the rare instance that they get the direction of their indicator correct, we know that there is no assurance that the subject asset will adhere to the seeming correlation. Do you see the forecasting problem for anyone claiming the dollar determines the direction of the metals when it has to be applied to market predictions? And, amazingly, it is not even logically consistent ab initio, so it is all a waste of time.
So claiming, after the fact, that the dollar rally caused the gold decline is not only intellectually dishonest and lazy, it is also unsupportable as an appropriate, logically consistent and consistently accurate forecasting methodology. Yet, it is an easy and superficial reason used by so many who have been so wrong about this market for so long. Attempting to trade the metals based upon this supposed causative link has likely caused more whipsaw (and puzzled looks) than profits. And, yet again, this method does not lead us to the "alpha" we seek.
So, forget China. Forget India. Forget interest rates. And, forget the US dollar. There is one fundamental factor that everyone should be keenly focused upon. There is only one thing that REALLY matters when it comes to gold. There is only one factor that you all should be keying in on. And, that one factor is the sun.
Yes, you heard me right. You see, if the sun comes up in the morning, then gold will rise. But, if it does not, then gold will fall. Got it?
Some of you may have even read that twice because it sure did not make sense when you read it the first time. Well, of course it did not make sense. It makes as much sense as suggesting that gold will rally if Trump wins the debate (yes, there was a recent article presenting this "thesis"). It makes as much sense as suggesting that gold will care about who is elected president. In fact, it makes about as much sense as suggesting that the market was manipulated to the downside again (even though we expected the recent decline) and then expecting the Chinese to prop the market back up again.
And, if gold drops after the sun comes up, then we will simply do as those who proffered the "Trump" thesis, and ignore our initial expectation regarding the sun, and move to something else convenient to point towards, like maybe the moon came out that night which "caused" gold's decline instead. Clearly, looking beyond superficial analysis allows one to recognize these as foolish suppositions propagated as "analysis," which are no less ridiculous then pointing to the sun or the moon as directional cues for the market. Yes, none of this truly provides "alpha" in the metals market.
Last weekend, I attempted to focus investors on what matters in this market, and to ignore that which is based upon seeming correlations. Just because something occurs at the same time that gold declines does not mean it is the proximate cause of that decline. And, if you begin to think for yourself, you will come to this same conclusion.
Despite the common lack of understanding that correlation does not equate to causation, we continue to see most analysis still based upon this logical fallacy:
When one sees price movement and then attempts to suggest that movement was "caused" by a news item, they demonstrate a clear lack of understanding that correlation does not equate to causation. This is a commonly accepted fallacy which is propagated by analysts and market participants alike, and leads to very superficial analysis, often resulting in erroneous conclusions about market direction.
So, is it not time to call a spade a spade? Is it not time to recognize folly for what it really is? Is it not time to actually become a thinking investor and expect intellectual honesty in the analysis we read? And, if you are a thinking investor, rather than an emotional or superficial one, you will be able to discern folly from true analysis, and view the markets from an appropriate perspective, which will lead you to the "alpha" you seek.
Ultimately, I am suggesting you ignore the seeming "causative links" that many attempt to proffer based upon news events, and view social mood and market sentiment as the true directional cause of price movement. You see, understanding the underlying social mood or market sentiment will often provide you the "alpha" you seek, especially since very few in the market you desire to outperform are focused upon this factor, even though it has often led the way.
Price Pattern Sentiment Indications and Upcoming Expectations
When it comes down to it, this is not a difficult market to understand, despite so many attempting to overintellectualize it. Even with the current rally off our bottoming region, I am still not convinced we have seen the lows in this market as I am not yet convinced market sentiment has bottomed. As I noted last weekend, I still think the market may need one more lower low. But, I believe we are getting very close.
So, as long as our resistance is not breached (122.75GLD, 18.60 silver, and 26.25GDX) , I would still "ideally" like to see at least one more lower low before sentiment turns negative enough to strike a solid bottom in this market. To put it simply, we need sentiment to turn bearish enough to support the next bigger rally we are expecting in this complex. And, I don't see anything that has strongly suggested to me that this has happened just yet, but, as I noted, I think we are getting very close. But, as I noted in my Trading Room at Elliottwavetrader.net over the weekend, that does not preclude the market from moving higher one more time to test resistance before those lower lows are seen, which seem to be playing out now.
But, I also want to note what I posted in my Trading Room on October 9th, as there is a difference between the timing of when one deploys their money in a market, and how one analyzes the market, since sometimes we do not get the "ideal" lower low we seek:
Folks . . where the GDX stands right now is not difficult. This is REALLY very simple. If we are REALLY bullish, we will hold the 19.80 region, and head to 60 . . . if we break 19, then it opens the door to a potential lower low. This is not brain science, but just risk/reward analysis . .. nothing more, nothing less. If you chose to ignore the upside for whatever reason, you lose a HUGE opportunity that CANNOT be gotten back. But, if you get stopped out, then you get to buy at MUCH lower levels and you have not lost anything other than a few points. REALLY SIMPLE when you break it down.
Disclosure: I am/we are long PHYSICAL METALS AND VARIOUS MINING STOCKS.
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: My long portfolio is hedged