Sentiment Speaks: Gold And Silver Simply Got It Wrong

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Price action over the last week.

Anecdotal and other sentiment indications.

Price pattern sentiment indications and upcoming expectations.

Price Action Over the Last Week

Last week, I noted the following:

As long as it remains over the 21.60 level on Monday, and continues to subdivide to a full 5 wave structure off its low towards the 22.30 region, then we have a strong initial indication of the resumption of a bullish trend. Any break down below 21.60 before 5 waves is seen will keep us mired in this downside corrective action.

On Monday, the GDX provided us with a 5th wave to complete the 5 wave structure before it broke below 21.60, and then pulled back on Tuesday, to set up the break out for which we were looking going into the Fed announcement on Wednesday.

Anecdotal and Other Sentiment Indications

Back in college, I had a dual major in economics and accounting. And, over my early years of investing, my training had taught me that a rise in the interest rate would cause an increase in the price of the dollar, which would then cause a drop in the price of metals. It does not get any more basic than that.

This past week, the Fed announced that it was raising interest rates, and that was no surprise to the market. They did exactly what they said they were going to do, and they even reiterated they will be raising rates further later this year. Yet, somehow, it seems to have caused great confusion to metals and dollar investors.

You see, rather than the dollar going higher and metals going lower upon a rate increase, they did the exact opposite of what everyone expected. In fact, they did the opposite of what the fundamental economic theory suggests they should do. Did the dollar and metals not learn what I learned in college? Well, it seems that this is one of those (MANY) scenarios where everyone was following the correct fundamental theory, yet, somehow, the market got it wrong.

Yes, that must be it. The market simply got this one wrong. I mean, it's not like the dollar tanked and the metals rallied on the news of the first rate hike back in December of 2015. And, it's not like the dollar tanked and the metals rallied on the news of the second rate hike back in December of 2016. Yes, it seems that the market has been wrong for quite some time now. But, fret not. Eventually, the market will follow the fundamentals. Right? (Yes, I am chuckling as I write this).

I read an article the other day which summarized the confusion in the market quite well:

The idea behind the Federal Reserve rate hike is that it will generally slow the momentum of money moving through the system-just as lowering interest rates is meant to get money moving. With tighter policy for money, the US dollar is generally believed to increase in value, which in turn allows you to buy more silver with the dollars you have-driving the price of silver lower.

What we saw yesterday didn't look like that. As the Motley Fool points out, silver and gold both reacted as if there had been an interest rate decrease. . . Silver moved 2.6% up, defying expectations and causing many in the market to start scratching their heads. So, what exactly is going on here?

Yes, indeed. Anyone who follows the basic fundamentals in this market was left "scratching their heads," and asking "what exactly is going on here?!" And, my answer remains the same: Sentiment trumps fundamentals.

Moreover, it is quite clear that the market did not read my non-fundamental warnings over a month ago, wherein I suggested that the dollar can very well drop when the next interest rate hike is announced.

As far as the metals market goes, several weeks ago, when the GDX was striking the lows, many in the market turned exceptionally bearish. So, as we were heading into the jobs report two weeks ago, I wrote the following to my members at on March 9th, at 5:24PM:

"I have been looking this over and over, and no matter how many ways I try to strike holes in this analysis, it is still pointing to the fact this is bottoming imminently. . ."

And, the GDX bottomed the next morning, which was also counter-intuitive to the standard fundamental perspective at the time.

Last weekend, I noted that we needed to stay over 21.60 on Monday and complete 5 waves up to give us a bullish set up going into the Fed announcement. On Monday, the market gave us our 5 waves up of the prior week's low, and on Tuesday, we saw a deep retracement of that initial upside structure.

The morning of the Fed day on Wednesday, I sent out a "Pre-Fed Warning:"

"please focus on the simplicity of where we are. Micro support is 21.20, with support below that at last week's pre-market low of just below 21. As long as we hold those supports, we have a set up in place to break out."

And, with the benefit of hindsight, we all know what happened later that day. But, please do not make the mistake of viewing the announcement as the "cause" of the rally. Rather, it only acted as a "catalyst." Remember, the substance of the catalyst - the rate hike - should have sent the metals lower if there was a true causal relationship, yet, the metals went higher. So, when the market does the exact opposite of what the news should have "caused," how does one reasonably view the news as the "cause" of the rally?

And, please spare me the convoluted "logic" that I have heard fundamentalists attempting to espouse to explain the market moving in the exact opposite direction it should have moved. Whenever I read those convoluted explanations, which fly in the face of basic economic theory, it brings to mind an old Ben Franklin quote:

"So convenient a thing it is to be a reasonable creature, since it enables one to find or to make a reason for everything one has a mind to do."

Again, it is much more accurate to view the Fed action as the "catalyst" rather than the "cause." This is true of any news event upon which the market reacts. Unfortunately, because investors can sometimes align the substance of the event with the directional action of the market, they assume that the news is the "cause" of the directional action. But, this is nothing more than adoption of the logical fallacy that correlation equates to causation. In order for them to maintain this fallacy, they must ignore all the many times the substance of the news does not align with the directional action of the market, of which we have experienced yet another example this past week.

As for me, I maintain no such illusions. To me, it is clear that the directional move is based upon market sentiment at all times, and the substance of the news is not material to the directional bias. This time, sentiment was set up to take us higher at the Fed announcement. And, the fact that we went up even though most believed that a rate hike was certainly going to cause the dollar to rally and the metals to drop helps prove my point, yet again, at least to those who are reading with an open mind.

This situation was no different than when I stated back at the end of the first week of November of 2016 that the S&P 500 was bottoming, and would rally to 2300 by year end NO MATTER WHO WON THE ELECTION. If you remember, everyone was convinced that if Trump won, the market would tank. And, the fact that it rallied to 2300 even when he won was quite similar to this event we just experienced with the metals rallying in the face of a rate hike. So, again, the market has provided us with another example of how sentiment trumps all other supposed market forces.

Now, don't get me wrong. I am not saying I am able to read market sentiment perfectly at all times. That is an impossibility. Rather, I am simply saying that we have caught most of the moves in all the markets we follow, and during the minority of times we read the market wrong, we have early enough warning so that we can modify our positioning without much pain. But, at the same time, I am also going to note that we were on the correct side of the major turns in most markets when the rest of the market was caught looking the wrong way due to their expectations based upon the substance of the current news (Charlie Hebdo attack, Fed rate hike December 2015, February 2016 stock market lows, Brexit, Trump, Fed rate hike December 2016, etc.).

If you are going to be honest with yourselves and your investment accounts, please look back at the last two years of market expectations surrounding news events relative to the market's actual reaction to those events, and you will see that the herd has ample fodder to strongly reconsider what they thought they knew about markets.

Price Pattern Sentiment Indications and Upcoming Expectations

While we confirmed the last bottoming in the market the other week with the initial 5 wave structure off the lows, we are still not out of the woods on the bigger time frames.

As long as the GDX holds over the 22.30 level, and rallies to a higher high in the coming week, then we have another signal that we are likely heading back towards the August highs sooner rather than later.

However, if 22.30 should break before we see a higher high relative to last week, then it would strongly suggest that the market will likely be heading back down towards the 20 region in the GDX, and it may not be a direct drop. If it still holds the 21.90 region, then it still can rally back to the 24-25 region even in that scenario, and then drop back down to the 20 region. But, the 22.30 level is now of utmost importance in the determination as to whether we head back to the August highs sooner rather than later.

Housekeeping Matter

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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.