Gold: A ‘Fundamental’ Perspective Of Bottoming ‘Fundamentals’

Avi Gilburt

So, you think that central banks’ buying of gold signals an imminent uptrend? Well they have been doing so for years, yet the price of gold continues to languish. You think that the Fed’s quantitative easing signals an imminent rally? Well, we are now in the midst of QE-Infinity, and gold has still been in a downtrend. Maybe you think “logic” dictates that gold should be rallying? But, there is a very good reason you have never seen a logician used as a market analyst.

So, maybe you believe that reading articles and analysts that believe exactly as you do will make you feel better about the 20% decline in gold through which you held and suffered? I am sure it is comforting to know that others also feel as you do and that you will ultimately be vindicated. But, are you looking for emotional validation or honest answers about the direction of the metals?

Most seem to be looking for emotional validation, and the best place to turn for that is your spouse. When you invest, you should be looking for intellectually honest answers and accurate predictive analysis, and not validation. Reading and following those that think as you do will only keep you mired in the muck of the majority, which is not where you want to be when investing in financial markets.

As I am sure you have heard from me so many times already, I believe that gold moves based upon sentiment and not fundamentals. Yes, I know how many of you ridicule me for this perspective. I know that many of you think that I have completely missed the boat. And, I know how many of you simply dismiss my analysis because I make statements that you believe are completely inaccurate.

So, why don’t we take a step back, and actually explore what I am saying in a bit more depth, and let’s see if it actually holds water.

The fundamentals since gold reached its top a year and a half ago have not changed. In fact, central banks around the world are supposedly accumulating more gold, and offering much more quantitative easing than even before. Our own Fed is now on a program of Quantitative Easing Ad Infinitum. So, can the fundamentals of gold be any more bullish? I think not.

Yet, when we look at the fundamental story, one would think that gold would now be trading around $3,000. But, in reality, we are languishing around the lows for the last year and a half. So, how can this be possible? Maybe gold simply did not get the multiple memos or read the ridiculous number of articles written about the fact that it should have been on its way to $3,000 already?

Or, maybe there is something that actually controls the metals’ movements much more than fundamentals? Nah!!! That can’t be possible!! You have been told by all the “smart” people to ignore what you are seeing with the price of gold. You have been told that it is manipulated. You have been told that the price will “eventually” adhere to fundamentals.

But, don’t you get tired of waiting for the “eventuality?” Could there be another way to analyze the metals that didn’t have you holding the bag while gold depreciated 20% from the highs? I propose there is.

As I have said time and again, the metals are moved by sentiment, both in the short term and in the long term. In other words, both the long term trend and the short term trends are governed by sentiment. And, yes, it is generally track-able.

Ralph Nelson Elliott theorized that public sentiment and mass psychology move in 5 waves within a primary trend, and 3 waves within a counter-trend. Once a 5 wave move in public sentiment has completed, then it is time for the subconscious sentiment of the public to shift in the opposite direction, which is simply the natural cycle within the human psyche, and not the operative effect of some form of “news,” or “fundamentals.”

This mass form of progression and regression seems to be hard wired deep within the psyche of all living creatures, and that is what we have come to know today as the “herding principle,” which gives this theory its ultimate power.

In 1941, Elliott stated, regarding the financial markets, that “the [Fibonacci] ratios and series have been controlling and limited the extent and duration of price trends, irrespective of wars, politics, production indices, the supply of money, general purchasing power, and other generally accepted methods of determining stock values.”

In fact, studies have been done in which subjects simulated trading currencies, however, there were no exogenous factors that were involved in potentially affecting the trading pattern. The specific goal of the studies was to observe financial market psychology “in the absence of external factors.” One of the noted findings was that the trading behavior of the participants were “very similar to that observed in the real economy,” wherein the price distributions were based upon Fibonacci ratios.

So, let me say that again. When subjects traded without any news or fundamentals, the price distributions mirrored what we see in the general financial markets. One can only conclude, based upon these studies, that fundamentals mean nothing when we want to understand and predict the price direction of a market. Rather, movements within markets are based upon human decision making and sentiment, which is governed by Fibonacci proportions.

But, many of you have questions whether this is really a “chicken or egg” argument? So, let’s take a hypothetical case and see how sentiment drives fundamentals and not the other way around, as most people incorrectly believe that news can cause or change sentiment.

Let’s say that an economy has been in free fall for quite some time. Everyone questions when the bottom will be seen and the news and fundamentals sound so bleak, that no one believes it is any time soon. Yet, the stock market has begun to go up for the last 3 weeks, even though the “fundamentals” are showing that the economy is still in free-fall.

Experienced and astute market observers know that, historically, the stock market has always bottomed before the economy does. But, have any one of you ever considered what causes this phenomena? Well, for those that understand what Elliott understood, this makes perfectly good sense.

During a negative sentiment trend, the stock market price declines, and the news seems to get worse and worse. However, once the negative sentiment has run its course, and it is time for sentiment to change direction based upon attaining its Fibonacci proportions, the general public then becomes subconsciously more positive. When people become positive about their future, they are willing to take risks. And, what is the most immediate manner in which the public can actuate this newly turned positive sentiment? Well, the easiest and most immediate way for the general public to actuate positive feelings about the future of the country is to buy stocks. For this reason, we see the stock market lead in a movement in the opposite direction. And, this is why Elliott believed that the stock market was the best barometer of public sentiment that we could find.

But, let’s look at the same change in positive sentiment, and what it takes to have an effect upon “fundamentals.” When the general public’s sentiment turns positive about the future, this is the point in time where they are willing to take more risks based upon their positive feelings about the future. So, business owners and new entrepreneurs seek loans to either build or expand a business, which takes time to secure. They then place the newly acquired funds to work in their business by hiring more people or buying additional equipment, and this takes further time. With this new capacity, they are then able to provide more goods and services to the public, and, ultimately, profits and earnings begin to grow, again, after taking much more time.

And, when the news of such improved earnings finally hits the market, most market participants seemed shocked that the stock moves up strongly in an uptrend, and simply attribute the stock’s rise to the announcement of positive earnings. This is exactly what prompted Elliott to note, in his 1946 publication of Nature’s Law, “At 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, there is a significant lag between the positive turn in public sentiment and the resulting change in “fundamentals” of a stock or the economy, especially when considered relative to the immediate actuating of such sentiment through the buying of stocks. It is for this same reason that fundamentalists are left holding the bag at the top of a market when the news and fundamentals look the best to them right before the market begins to dive. Anyone remember a little company named AAPL?

So, now you must be questioning how one can tell when sentiment is about to turn. Well, again, it brings us back to Leonardo Fibonacci and R.N. Elliott. After a 5 wave move in sentiment has completed, and the Fibonacci proportions have been mathematically satisfied, that is usually the signal that the market is ready to turn. This is the exact reason why I was able to predict the top in AAPL when everyone else was looking for $800-$1000.

So, where are we now in the pattern for gold? Well, nothing has really changed since last week:

As for GLD, it has still not been able to take out the long time support region we have been noting at the 151 level. So, for now, the immediate region of resistance I see for GLD is the 157-158.25 region. Assuming we can see a strong move through that region in GLD, then we can look towards the 161 region next, which represents the .764 extension down, as well as the .500 retracement of the prior larger rally.

And, if GLD can move through that region, then the final region that will be contested is the 170-174 region before we can see a massive break out taking us to new highs.

And, to remind you of the support levels below the important 151 region Fibonacci extension, it is the 148/149 confluence region, and then 146.


About abwehra group

The Art&Science of Trading Gold
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