IS IT TIME TO JUST GIVE UP ON GOLD ? / SEEKING ALPHA

Is It Time To Just Give Up On Gold?

Avi Gilburt

Oct. 12, 2014 1:07 AM ET

Summary

• Many bulls are seemingly giving up on gold.        
• What metrics should you follow for substantiation of your "fundamental" perspective?
• Upcoming week's expectations.

This past week, we have seen some notable analysts give up on gold, and state that it is clearly in a bear market. Many more articles are coming out about gold's demise. I am also seeing more and more vociferously bitter comments by frustrated buyers of metals, who are now attempting to blame those that warned of this drop as the "cause" of their pain. Is there really no more hope?

After my last article on metals, some of you have voiced some "displeasure" with my perspective on markets. In fact, the ones that were willing to even partially accept my perspective have begrudgingly noted that "sentiment works only in the short term, but fundamentals win out in the long term." Several other Seeking Alpha contributors specifically took this position, albeit somewhat unwillingly.

So, let's test this proposition, shall we?

The main proposition accepted by the market as a whole is that fundamentals control the market and the direction of the metals. And, for years, all we have heard is that the fundamentals for the metals have never been stronger. But, only now are we starting to see articles coming out about weak purchases in China, or India, or other cracks in the fundamental arguments.

Now, my proposition is that fundamentals are a purely lagging indicator, which always look best at tops and worst at bottoms, the support for which I presented last week. In fact, how many articles have you read that noted "the fundamentals for the metals have never been stronger" in 2011-2013? But, now, aren't you starting to see some cracks in that fundamental armor?

So, of course, those that cling to their false gods must take the perspective that they are only talking about the long term fundamentals, because it is now abundantly clear that short term fundamentals do not control this market. At least we have made some progress over the last few years. But, attempting to bifurcate this perspective after its clear failure is a bit dishonest in my eyes.

So, are long term fundamentals that much more accurate than sentiment?

Let's take that apart as well. What you are saying is that following fundamentals on the "long term" for silver is the correct way to go, even though you take a 60% haircut in value. And, that is much more accurate in the "long term" relative to those that use sentiment in their analysis on both the long and short term? Sentiment instructed me to get out of gold at $1,915, as published here on Seeking Alpha, from a "long term" perspective. Did long term fundamentals identify that turn? I mean, it was a long term trend change, was it not?

Or maybe I am just not reasonable in thinking that a 3+ year downtrend is to be considered a "long term" move? Well, if the U.S. Tax Code can take the position that anything over 1 year is to be considered long term when they tax me, I think it is reasonable to assume that anything over 1 year can be considered long term from an investment standpoint. Do you want to hold a losing position for more than a year? I know I would not.

But, the truth is that claiming long term fundamentals will win out in the end is saying absolutely nothing. It is simply saying that since you are sure the market is going to go up again, you can always come up with a reason for that perspective. Remember, markets do move in two directions, so, ultimately, yes, the metals will go up again.

Rather, it is an excuse to make you feel better for holding your "long term" investment during a period of significant draw down, without being hedged. All you are saying is that you only see a market going in one direction - which never happens - and you want to find a reason to do so. And, as I have said many times before, you MUST be honest with yourself or else you set yourself up to continually lose money.

Remember, the same sentiment patterns we follow on the short term apply equally as well for long term trends too. Have you not seen me begin to look to the long term buy side? Does that tell you that sentiment will be left in the dust by "long term fundamentals eventually pointing higher?" Do you really think I am going to abandon my sentiment analysis now for some "fundamental" perspectives in this market, no matter the time frame? I actually chuckle when I see people commenting to me that "when fundamentals finally take hold, it will leave your sentiment analysis in the dust." Does anyone else see the fallacy of such a perspective?

And, as many of you who have read my articles already know, I am already starting to position for the longer term trend change, especially in silver. Did I need long term fundamentals to tell me to do that? Longer term fundamentals would have had me buying at 50 dollar silver and 1915 gold, rather than shorting them as I did.

Ultimately, my point is that if you feel the deep seeded need to "believe" in fundamental or logical arguments to guide your investments - even though markets do not react logically, I would strongly suggest you do some form of sentiment analysis as well, to at least provide some support for your bigger perspective. Otherwise, you may ride a fundamental wave all the way to the poor house. Yet, I am certain you will "know" you are right for doing so based upon your "fundamentals." This is the ultimate game of fooling yourself, and there are few with higher stakes. As R.N. Elliott said in 1946, "[i]n the dark ages, the world was supposed to be flat. We persist in perpetuating similar delusions."

To illustrate this point so clearly, I saw someone post the following on a metals article of an analyst that has been bullish for quite some time based upon various long term "logical" arguments about the fundamentals of the metals' market:

You know something? Your article is so well written, so "clean", and so logical constructed, that it can only be WRONG. Each time I've trusted in this kind of speech, I've lost money.

Now, on to our expectations for GLD. It has been a very interesting week that has passed. The GLD has finally provided me with the bounce I wanted to see, and it now has a very important decision to make about whether its final lows will be seen in 2014 or 2015.

But, before I continue, I want to note something of interest to those that follow miners. First, we have seen silver lead to the downside and provide us with a break down below its 2013 lows.

This was my initial confirmation that I was correct in my assessment of going against the majority belief, and maintaining that metals will make lower lows this year, despite many voicing their opinions about how wrong I was. This past week, we saw that the GDX has now made a lower low relative to 2013.

This, too, is a signal to me that there is still further downside in many of the miners we track at Elliottwavetrader.net. This also provides even further confirmation that GLD will likely see lower lows as well, as silver and GDX have now invalidated any potential for a bullish structure off the 2013 lows.

Yet, the fact that GLD and gold have not broken down below their 2013 lows yet has still left some potential for them to rally much harder than most expect and to create a bullish "façade" once again, before the final lows are set up. But, that cannot be my primary expectation at this time. Rather, as long as we remain below the 119.50-121 region, I will be looking for that break down to lower lows, and the end to this 3+ year correction within the next few months. However, should we break upper resistance, we can rally all the way back to the 130-133 region by year end, setting up our final lows into 2015.

But, the more action we see across the metals market spectrum, the more I am convinced that gold will see those lower lows, and wash out the remaining bulls. The only question now is just how cruel will the market be, and if it will suck in more bulls before their final demise. Be prepared, and don't be fooled.