Time To Sell Your Gold?

by: Avi Gilburt

I bet you thought I lost my mind after reading the title of the article. In the past, many of my critics often quoted the title of my articles to prove how wrong I have been. But, yes, I was being quite facetious in the title, so please do not believe that I am suggesting you sell your gold right here and now.

And, as usual, the jabbering continues about "facts" which will cause gold to begin to rally all week. Several authors have dusted off the same arguments that have not worked in the past, and felt that it was time to present them one more time. Among the "reasons" that gold will rally, which have been presented this past week, include the resurrection of "troubles in the Eurozone." Some point to the fact that the Cyprus issue may reel its ugly head again, or even in other countries. Others this past week were pointing to the massive amount of easing being engaged in by the Asians.

But, have these analysts even cared to look at the recent history of what happened when such "events" have occurred? Over the last two years of gold's correction, none of this has mattered to cause the next parabolic phase in the metal. Rather, they come up with some "reason," after the fact, about why it did not matter to the market this time, but then conclude that it will matter the next time. This is truly one of the most intellectually dishonest perspectives one could proffer. Think about it. If markets were truly Newtonian in their actions, then a specific catalyst should always cause a specific reaction. One cannot say that a specific action will cause a specific reaction this time, but next time will cause a different reaction.

However, markets are not Newtonian in nature. Yet, the common perspective is that an asset will move in a straight line until something acts upon it to change its direction. Well, even the world of physics has moved away from this perspective, as Einstein wrote "during the second half of the nineteenth century new and revolutionary ideas were introduced into physics; they opened the way to a new philosophical view, differing from the mechanical one."

Unfortunately, the investment community still believes in this concept, and is on the lookout for the latest "catalyst" that will cause the change in direction of gold. For the last two years, reason after reason has been paraded through the media, and none of it has mattered. Gold is still mired in its correction. So, if one were a logical, open-minded, intellectually honest thinker, one would have to recognize that it must be something other than a "reason" which will cause gold to rally.

So, rather than a "reason," our view is that gold will only rally when the sentiment is ripe for such a rally to take hold. This is why we track sentiment, and attempt to discern when sentiment has dropped to the point where a change of direction will ensue, with or without news or reasons.

Since GLD topped two years ago, I have had the 142-144 region as my target for the bottom of this correction. While most have simply assumed I was crazy for maintaining this target region for the last two years, we now find ourselves in this region.

But, based upon my perspective last week, I did not expect this drop to occur this past week. So, admittedly, I missed the set up for this drop, as I had mistakenly expected that it would have begun from the 158 region. While I believe and have been told that I have been more accurate than most in navigating this correction for the last two years, and even though I constantly strive for perfection, I clearly did not identify the top for this drop as exactingly as I have in the past.

So, after a two year consolidation, is it now time to give up on gold? Hardly.

Baron Rothschild, an 18th century British nobleman and member of the Rothschild banking family, said "Buy when there's blood in the streets, even if the blood is your own." This is contrarian investing at its best - the strongly-held belief that the worse things seem in the market, the better the opportunities are for profit.

Now is the time to do what is difficult, and look for a strong buying opportunity. So, after running some additional numbers on Friday, I am going to slightly modify my downside target and look for a bottom in GLD as low as 141-141.50. My stop for any buys at this time will be just below 136. A break down below 136 can take us down to 127 next. But, before I can even consider a bottom being made, I will need to see at least a day long consolidation higher followed by one more drop to feel a bottom is being made.

So, for now, we are approaching a strong region of confluence at which gold can mark a significant bottom.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GLD over the next 72 hours. 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.

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