What Is The Most Important Fundamental Reason For Gold?

My Beginning

When I began my investing career, like many of you, I devoured everything I could possibly read on the subject of investing so that I would be able to choose wise investments for my hard earned money.  I figured that if I was able to develop an “expert” level of knowledge on a particular market or sector, then I would be able to outperform the rest of the market.  So, being a lawyer and an accountant, as well as a voracious reader, I set about my task with great fervor.

Sadly, the more I read and the more I learned, the less I was able to outperform the market. It often left me scratching my head when a stock or market moved in the exact opposite direction dictated by the fundamentals I was reading.  Needless to say, the losses began mounting in my investment account.

Yet, for some reason, I was comforted when I heard an analyst on television state that “the market is just not trading based upon fundamentals at this time.”   While the deep red was clearly evident in my trading account, at least I was not stupid or wrong.  Or, so I thought.  For some reason, hearing those words made me feel better even though the losses were still mounting.  It was somehow acceptable to have losses in my account, since I “knew” the market was wrong, rather than my analysis.

Well, it did not take much more in the way of mounting losses to eventually come to the realization that I was simply part of the herd, and the herd will never recognize a trend change before it happens. Rather, they are simply “herded” to the slaughter. 

As an average, everyday Joe, I had to come to the realization that fundamental analysis was not going to give me an edge over the rest of the market.  I recognized that not only was the market not trading based upon fundamentals at a particular time, but that fundamentals are really not what drive markets at all, rather, they lag the market. 

I Found An Answer

Ultimately, my search led me down a path of understanding market sentiment, which made a lot more sense as a driver of markets than the lagging fundamentals I had been studying.

For those of you who have been involved in the metals market for the last 5 years, you have likely experienced the entire range of emotions and market sentiment.  Back in early 2011, you were likely feeling quite good about your investment in gold, as gold began a more than $500 rally into the summer of that year.  I would call this your proud, or back-patting phase.  You felt really good about your gold positions, as they were quite profitable.  Everyone around you was also feeling quite confident in the gold market as it continued higher and higher.

As we moved through the year, the metals continued their strong climb, sometimes moving $50 in a single day.  It was clear that the market entered a parabolic stage.  For those of you that remember that time, everyone was certain that gold would eclipse $2,000 an ounce.  Again, if you remember, all the metals analysts were wildly bullish with euphoric expectations of the market certainly eclipsing that $2,000 mark. In fact, many were passionately chanting “higher, higher” just as the market was topping, as they were irresponsibly inducing the masses to continually “buy, buy, buy.” 

Back then, those that were following my analysis were preparing for the impending market top in gold, as I was calling for a major top at $1,915. At the time, I had noted two regions where the market could bottom, even before we topped.  Ultimately, my ideal target zone for this correction was in the $1,000 region.  Again, I made this market call before the market even topped.

If I would say that most of those who read my analysis at the time ignored it, I would be quite kind.   Rather, I was ridiculed for daring to even consider that gold was going to top.  How dare I publicly state that gold was going to top, since it was clearly going over $2,000 based upon everyone else in the market?

Well, 4 years later, after having recently bottomed in the target region we provided even before we topped, I think we all know how this story has turned out.  Yet, for the last 4 years, the perpetual bottom callers have proffered many reasons for their belief that the market was bottoming imminently week after week.

Included in the myriad of reasons we have heard are: Russia, Syria, Ukraine, the COMEX blowing up, quantitative easing, safe haven asset, inflation, deflation, demand in China, demand in India, and many others not listed here. Week after week, over the last 4 years, we have all read those articles that have presented all these reasons and more as to why the metals are going to bottom and begin a strong rally. But, the metals have really not cared for any reasons.  Rather, they continued to slide lower and lower, despite all the reasons they should have been moving higher.  In fact, silver has lost almost 75% of its value from the 2011 market highs, despite many claims that the fundamentals were still strong.

Yet, these analysts perpetually made market-bottom calls each time we experienced even the smallest counter-trend rally.  Sadly, many investors followed them.

Einstein said that insanity is doing the same thing over and over, but expecting a different result.  So, according to Einstein's definition, this 4-year correction has clearly afflicted this market with a bout of insanity.

Now, for those Seinfeld fans out there, you would probably have done better following the George Costanza investing theory as opposed to following most of the supposed “experts” for the last 4 years.

As Jerry put it, “If every instinct you have is wrong, then the opposite would have to be right.”

You see, every fundamental perspective that has been put forth over the last 4 years has meant nothing to the price. You would have done quite well if you did the exact opposite of what the fundamentalists have suggested over the last 4 years.  Yes, the Constanza method of investing trumped fundamentals for over 4 years in this market.  

Ultimately, one has to realize that fundamentals do not control price.  And, some have been figuring it out the hard way, as presented by these representative comments I have collected over the last few months:

“Gold has not been making sense for over 2 years. Gold moves against all fundamental factors, high physical demand, lower production, war, etc. More bullish it gets, more gold is whacked.”

Investor

“No amount of quantitative easing anywhere in the world has done the price of gold any good. Neither have near-zero interest rates. Nor has enormous physical demand from India and China. Nor the staggering debt in the United States. Nor a race to the bottom in many currencies.”

Bill Murphy  - GATA

“Forecasting today's volatile, high-frequency machine driven and manipulated futures markets using fundamental analysis is futile, as a great many precious metals bulls will attest.”

Analyst

Why have fundamentals failed so miserably? 

Well, in order to appropriately answer the question, we may have to actually understand that we are asking the wrong question.  In fact, one has to ask if fundamentals were ever really controlling the market to begin with? 

Yes, I know everyone believes that, “eventually” fundamentals will control this market.  But, if one is truly honest in seeking an answer to this question, one has to ask themselves the following question:  If fundamentals do not control the market ALL the time, are they really ever in “control” of the market any of the time? 

Or, is it simply that when the market is moving in the same direction as dictated by the fundamentals, then the fundamentals are simply a coincidental factor, rather than a controlling one?  This is what we refer to as the “broken clock” syndrome. 

How can one look at the price of silver being cut by 75%, while the fundamentals remain strong, and be able to honestly believe that fundamentals control the market? 

If you were using a toy steering wheel to try to turn a car in a certain direction, and the car kept going in the opposite direction for 75 miles, would you still think your toy steering wheel was directing the car?  I sure hope not.  Yet, amazingly, this is how supposedly reasonable people view the fundamentals of the metals market.

Again, based upon the market action over the last 4 years, one has to come to the conclusion that fundamentals are really not in control of this market.  Rather, the driver of the car in the metals market is sentiment; and it controls the market all the time and has its hands quite strongly on the steering wheel. 

In fact, our manner of tracking market sentiment had us exiting the market in 2011 when we exceed the $1,900 mark, and then had us looking to enter the market at the end of 2015 and early 2016 when the market hit our BUY boxes.  So, I ask you, which seems to be controlling the market – fundamentals or sentiment?

Ultimately, a prudent investor must have a manner in which they are able to track market sentiment if they expect to be able to outperform the market. 

But, my point here is not to suggest that you must be able to buy every low and sell every high. Rather, the appropriate manner in which one should be viewing the market is knowing when to sell and then knowing when to buy back what you sold.  This is what everyone knows as “buying low, and selling high.”  This is the ultimate goal for every investor. So, this was the goal of the BUY box we provided to subscribers on our site at Elliottwavetrader.net. Take note that it does not say one needs to be buying THE low, and selling THE high in order to be an accomplished and profitable investor.  Certainly, as I have noted over the years, the market could see lower lows in an overly-emotional downside reaction.  However, the box presented a region at which there was a high probability the market could bottom, and that is why it was a suggested long-term buying region.

But, lately, I have seen many comments like this being posted at the bottom of articles written by so many of the supposed experts in this market, as they called a false bottom week after week. This one was posted about a month or so ago:

“For the first 80-90% of this decline you have been proclaiming a "once in a lifetime" bull market to come only for the market to keep going lower. Then, you started showing the various analogues, again pointing out the "vast wealth" that lay ahead, only for the market to keep going lower.  For the past few months you have turned decidedly towards the other side, telling us how "each rally is doomed". How is it that people like yourself claim to be "experts" and why should anyone believe what you have to say since you've been dead wrong the whole way down.”

As I noted at the start of this article, the last 4 years have seen quite a lot of sentiment changes in this market.  We started with euphoria, which quickly turned to disbelief, which then morphed into hope. 

During the last year, we have seen more and more comments like the one on the screen right now, which evidenced the anger being felt by investors, and rightfully so.  Many were urged to buy at the all-time market highs, and to continue to buy all the way down.  And, as the market was getting closer to the lows, they were then told to short the bounces.

But, take note of something interesting being pointed out in this last comment.  It seems that the prior uber-bullish analyst has recently turned decidedly bearish.  Along these lines, I have seen a very interesting recent shift in the perspective of investors and commenters to articles on gold, just like the one overhead.

In fact, two weeks ago, I had a personal experience which was quite interesting.  As some of you may know, I write for Market Watch, and sometimes I will post an article about precious metals.  Over the last few years, I have been told that my gold articles have been some of the most well read articles published on Market Watch.  In fact, an article I wrote last year on gold was read by hundreds of thousands of people. 

But, two weeks ago, as the metals were soaring, I published another article on gold, and the editors told me that the interest in the article was a bit lower than my other articles.  Also, many of the comments to my article were much like this one:

“Bottom In Gold?  No way!!  It's worthless junk. Obsolete. It's days are over. After all these ages, people are finally figuring out that its always been totally worthless. So, stay away. If you have any, do yourself a favor and dispose of it in the trash. Can't you see - It's obviously going to hell in a hand basket. Maybe buy a bit when it falls to 700.  .  .”

So, it seems many have begun to lose interest in gold.  While we are still seeking confirmation that the long-term bottom has, in fact, been struck, this is further anecdotal evidence in support of that perspective.  We needed to see the market turn bearish or indifferent to suggest a bottoming is going to occur.

There are also still many investors waiting on the sidelines expecting that gold is going to break below the $1,000 mark, where they have been patiently waiting with all their buy orders.  This may be no different than all those who were so certain that gold was going to rally through $2,000.  Markets don't often make it that easy for the masses.  And should the market prove to have bottomed, the chasing by these investors will likely fuel the next wave higher once they realize that the market has passed them by.

This was the first half of the presentation I gave at the International Traders Expo in New York last week, for which I have had requests to post.  I will provide the second half of my presentation next week, which discusses my long-term projections in the metals complex.