Price Action Over the Prior Week
Over the last week, we have seen gold provide us with a nice pullback. The market seems to be in a corrective state right now, but nothing is yet suggesting that we need to expect anything significantly bearish at this time.
Anecdotal and Other Sentiment Indications
For those of you that have been familiar with my analysis before my hiatus from Seeking Alpha, my perspective of markets is based upon market sentiment, rather than fundamentals. And, the funny thing about how market sentiment works is that it often provides a purely contrarian perspective at the point in time when the market can see a turn in price. In fact, for those that remember, it was my first market call on Seeking Alpha back in August of 2011 which called the top to the gold market within $6 of the actual high struck in 2011 as many were certain we would be eclipsing the $2,000 level.
For the last several years, while the metals have been dropping in their long term corrections, many continued to point towards the rising demand in China and India as being the definitive indication that the metals were about to soar. However, not only did this not mean anything to price action, but price continued to plummet in the face of these factors.
Recently, Lawrence Williams penned an interesting article wherein he noted how Chinese demand has dropped 18% during 2016 (along with a drop in demand in India). Yet, the market has seen the strongest rally experienced for the last 3 years during this time when demand has strongly dropped in these countries. Yes, I know this is a head scratcher to those that do not understand market sentiment. But, do you need more evidence for the lack of efficacy of following such misguided perspectives, no matter how counter-intuitive the more accurate perspective may be?
Moreover, government actions have also been quite indicative of this contrarian thesis. Many believed that the strong demand seen by governments over the last several years indicated that the market was going to see a strong rally. However, it seems the exact opposite - government selling - may have actually indicated the long term bottom in the metals.
You see, governments are usually the last actors within the chain of events, and are always reactive to societal events. Just think about what often prompts new laws, especially in the finance arena.
For the perfect example of a government being the last actor within a trend in gold, we can look back to the last gold bear market. The last bear market in gold lasted from 1980 until 2002. Between 1999-2002, when gold prices were at their lowest, Gordon Brown, who, at the time was the UK Chancellor of the Exchequer, decided to sell approximately half of the U.K.'s gold reserves. As we now know, that marked the end of the gold bear market, followed by a strong rally into 2011 which saw gold increase in price by over $1,600. The price multiplied by over six-fold from the low in 2002. This became known as the "Brown Bottom."
Along these lines, in October of 2015, I wrote an article suggesting we are approaching a major bottom in the complex, and noting how Venezuela could be selling more than 3 million ounces of gold reserves before year-end. The country has more than $5 billion in maturing debt and interest payments due before year-end without the ability to repay it. This was the first anecdotal potential for an approaching long term bottom that came up on my radar.
And, in January of 2016, it seems that Venezuela sent $1.3 billion worth of gold bars to Switzerland, according to data from the Swiss Federal Customs Administration. In fact, it seems that the Central Bank of Venezuela has reduced its gold holdings in 2015 by 25%, and this is even before hearing about this transfer in 2016.
Then, in March of 2016, we found out that the Bank of Canada's gold reserves have been reduced to nothing. As amazing as it sounds, that is a fact. Canada has now sold its gold, which is an event similar to what occurred in 2002 with the UK's sale of gold.
With the technicals suggesting that the long term bottom may have been struck, the anecdotal evidence of governments again selling at the bottom would add support to what the technicals may be suggesting. Maybe this time it will be known as the "Maple Leaf Low."
Price Pattern Sentiment Indications and Upcoming Expectations
For the last 7 months, many were certain of lower lows below $1,000 in gold and have been on the sidelines. Many are now calling for a large pullback in the market before they move into the market. Maybe they are right. But, based upon the current pattern we are seeing, they may be watching for the rest of 2016.
From 2011-2015, the metals market has provided very hard lessons to market participants. It has predominantly taught them that rallies are to be sold, since it "always" leads to a strong drop. Many have still retained this same perspective, even though it is becoming more and more likely that we have moved from a corrective market back into a bull market. Many have been selling every time they see a small decline in the market.
In fact, I received a number of comments to other articles I have written, questioning my view that we may not see many more pullbacks for a while. Some on Seeking Alpha have even compared my analysis to others who are confident of a pullback, concluding "we will see who is right."
Anyone who takes such a perspective about the market really does not understand the market. Clearly, those that were sitting on their hands at the lows, and waiting for the market to drop lower have not made any money. In fact, many have been shorting all the way up in 2016, and have even lost a significant amount of money. There is nothing "right" about that.
For those that have read Jesse Livermore, allow me to quote one of his famous sayings:
After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It was never my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight!
Ultimately, being "right" means knowing when to get into the market, when to get out, and when to just "sit tight," with appropriate stops in place. And, those that follow me at Elliottwavetrader.net have gotten into the market "right" at the end of 2015 and early 2016, we have been "sitting tight," and we have "appropriate stops in place." I would say we have done everything "right" for 2016. And, even in the lesser likely event that the market does make a lower low, we will have been stopped out of all our long positions, after making more than 100% off many of the stocks we bought back in 2015 and 2016.
So, as long as silver remains over 19 and GLD remains over 124.50, and GDX remains over 27.70 I will continue to "sit tight" and look higher. A break of those levels will have me reconsider my expectations. Our next higher minimum targets are 137 for GLD, 22.15 for silver, and 33.50 for GDX. Should all those levels break as support, I will have to adjust my larger degree wave structures, but the likelihood that a lower low may be seen is estimated to be between 25-30% in my humble opinion.
Disclosure: I am/we are long SLV OPTIONS 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.