Should Technical Analysis Be Ignored In Determining The Price Of Gold?

Sunday, June 5, 2016

Ben Franklin said, “that which hurts, also instructs.”  So, one would assume that all those that have been burned in the metals market for the last five years should have learned something by the pain they felt in their accounts. 

Sadly, this does not seem to be the case.

“Why Technical Analysis Does Not Work For Gold And Silver”

Recently, I read an article by Michael Ballanger entitled “Why Technical Analysis Does Not Work for Gold and Silver.”  And the article is exactly what the title promised it would be – a foolish rant by someone who clearly does not understand the metals and miners market.  In fact, I believe the article writer is a follower of fundamental analysis, was bullish of the complex the entire way down, and blamed manipulation for the drop.  Need I say more?  Probably not, but, I will anyway.

What Has Truly Failed Investors?

The first problem so many have when they attempt to analyze a market is they believe that logic, along with Newtonian laws of physics, will take them down the path to riches.  This is the basis behind fundamental analysis.  It basically suggests that an outside stimulus will cause a reasonable and discernable reaction in the market upon which the knowledgeable investor can capitalize. 

And, when we are dealing with the metals market, the elephant in the room which clearly disproves this theory is quantitative easing.  Remember when the market (along with the article writer) was of the firm belief that QE will certainly cause the metals to rally to “infinity and beyond?”  I mean, it was just so logical to those, such as the author, who believed that the government’s “printing” of so much money must cause the metals to skyrocket.  And, rather than skyrocket, the metals tanked.  I mean really tanked, wherein silver dropped to 75% of the value it had attained at its 2011 market high.  If this event did not shake fundamentalists to the core, then Franklin is probably wrong. It seems many are just too foolish to learn from their pain.

How To Approach Technical Analysis

When one understands that financial markets are non-linear beasts, one has begun down the path of appropriately understanding how to approach those markets.  One will never be able to know, with certainty, how a market can and will react. Rather, one must approach markets from a perspective of probabilities.  And that is what technical analysis offers - if one understands how to use it appropriately.

But, just like any industry out there, we encounter exceptional professionals who apply their craft with a high level of proficiency, precision, and accuracy, along with those who are simplistic and much less accurate.  But, to assume that we have to throw out the entire perspective of technical analysis as unusable when one analyst within a certain perspective is wrong, that is the true definition of foolish.  What has happened to intellectual honesty?  Sadly, it seems to have left the building.  

In fact, Mr. Ballanger used as the basis of his perspective a trend line analysis of the market, which is the crudest form of all technical analysis.  Mr. Ballanger’s admitted his lack of understanding of technical analysis allowed him to believe that this was the penultimate of analysis methodologies to which he can point as disproving all basis for using technical analysis.  And, in doing so, Mr. Ballanger proves his own foolishness in attempting to opine about that which he admittedly lacks understanding.  Think about it.  How can one who admittedly lacks understanding of a subject matter offer an appropriate, objective and reliable opinion?  This factor alone highlights the shoddy basis underlying his entire article and perspective.

When technical analysis is applied properly, we have a been able to identify the top to the gold market within $6 of the actual high struck in 2011, and then get long of the market at the end of 2015 and early 2016.  In fact, we got long at a region I posted as a target to get long 3 years ago, when the market proved to me it was going even lower.  So, maybe we should give back all our profits since, “clearly,” technical analysis must not work.

Avi Gilburt

Avi Gilburt is a widely followed Elliott Wave technical analyst and author of ElliottWaveTrader.net (www.elliottwavetrader.net); a live Trading Room featuring his intraday market analysis (including S&P500, metals, oil, USD & VXX); interactive member-analyst forum; and detailed library of Elliott Wave education. Visit his website:https://www.elliottwavetrader.net. You can contact Avi at info@elliottwavetrader.net.