Sentiment is the most important factor in the gold market. Here is why that is, and what sentiment is telling us about gold right now…
I have now been a contributor at Seeking Alpha for seven years, during which time I have written for approximately six years, as I took a one-year hiatus. And, during that time, I have had the honor of penning almost 400 articles.
During the six years I have been actively writing on Seeking Alpha, 30,000 of you have trusted me enough to begin following my work, as I just hit the 30,000-follower mark. For that I am very grateful, honored and humbled. So, I wanted to first thank you all.
When I began writing about market sentiment being the primary driver in the metals market, many viewed my analysis as foolish, ridiculous, or simply “not understanding the metals market.” Well, that was until people started taking notice – when I called the top in gold within $6 of the high struck in 2011.
If you remember that period, gold was soaring, sometimes by as much as $50 in a single day. In fact, almost no one questioned whether we would break through the $2,000 mark; the only question being argued at the time was how far through $2,000 we would break out. The euphoria was palpable. It meant that the entire market was bullish, so the question you should have been asking yourself at the time was who was left to push the market higher, rather than how much higher over $2,000 we would see.
I used Elliott Wave analysis, enhanced by the Fibonacci Pinball methodology we developed, to calculate that gold would top at $1,915. And, as we now know, gold topped at $1,921 a month after I made my top call.
At the time, I remember being the lone voice in the market discussing how market sentiment suggests that we are approaching a potentially major top in gold, with a minimum expectation of a 38% pullback, but with the bigger potential to drop back down to the $1,000 region if that 38% correction did not hold support. And all of this was calculated using Elliott Wave analysis, modified by our Fibonacci Pinball method, well before the market actually topped. And, yes, most at the time thought I had lost my mind.
Over the last several years, I have been writing a Sentiment Speaks column on Seeking Alpha after discussing the concept over lunch with Eli Hoffman. When I began, I was the lone voice on Seeking Alpha discussing how important sentiment is within financial markets. And, over the last year or two, I have begun seeing more and more analysts on Seeking Alpha discussing this perspective as a focus within their analysis, with many of them noting that my accuracy in market forecasting led them to conclude how important it must be. I am quite glad to see this.
However, I think those who have only recently begun their exploration into market sentiment are in the infancy of their learning curve. In fact, over the weekend, I read an article by a perma-bull in the metals market who seems to have discovered the importance of market sentiment after having remained bullish during the entire 2011-2015 decline.
Despite his initial foray into attempting to understand market sentiment in the gold market, he wrote, “[s]entiment of course is ethereal, impossible to directly measure.”
As those who have been following my work for the years I have been writing on Seeking Alpha would know, I have been using an objective mathematical methodology through which I am able to gauge market sentiment with a high level of probability.
I have outlined this perspective in prior articles, and it can be summed up in the following paragraphs:
Back in the 1930’s, an accountant named Ralph Nelson Elliott identified behavioral patterns within the stock market which represented the larger collective behavioral patterns of society en masse. And, in 1940, Elliott publicly tied the movements of human behavior to the natural law represented through Fibonacci mathematics.
Elliott understood that financial markets provide us with a representation of the overall mood or psychology of the masses. And, he also understood that markets are fractal in nature. That means they are variably self-similar at different degrees of trend.
Most specifically, 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.”
Therefore there is, indeed, a manner in which we can objectively and mathematically measure market sentiment. While this other analyst may be correct in that this is not a “direct” measure of market sentiment, as we are using the buying actions of market participants to glean where we are in the market sentiment pattern, I believe this is only an academic difference.
At the end of the day, Elliott Wave analysis (when used appropriately) provides us with a relatively accurate manner in which we can measure market sentiment. And we have proven that, if you used it properly, you would not have been caught looking higher in 2011 as the market was topping or looking lower when the market was bottoming at the end of 2015.
Even recently, as the gold market was hitting its low in August, and most analysts were calling for sub-$1,000 gold prices as we were bottoming out, we were looking for a rally to take us back to the $1235-$1255 region (SPDR Gold Trust (NYSEARCA: GLD) $116.25-$118.25 region). Again, the market was so heavily weighted on expectations of sub-$1,000 gold that it was highly unlikely that this would actually be seen, and I continually reiterated this to my subscribers at ElliottWaveTrader.
If you would like to learn more about this methodology, you can always look up the five-part series I wrote entitled “This Analysis Will Change The Way You Invest Forever.”
In its simplest form, when a bullish sentiment trend is nearing completion, the great majority of the market has turned bullish, which means that there is no one left at the margin to push the market higher. And, as I have noted in the past, bull markets do not end when investors sell. Rather, bull markets end when there are no more buyers to push it higher. The same applies in the opposite manner to bear markets. So, understanding where we reside within the trend is the key to being able to determine just how bullish the bull market really is and vice versa.
I sincerely hope this series can direct those in their infancy of understanding market sentiment to a more mature understanding. Moreover, I sincerely hope that I have at least opened some eyes through the years about how market sentiment is the true driver of the market and that it can be measured through Elliott Wave analysis in a probabilistic manner.
Currently, the gold market is trying to decide if it has one more decline before we begin the next major rally we are expecting. As long as the GLD remains below $118.25, I still think we can retest the $109 region, and drop as deep as the $105 region. And, should we see such a decline, you can be quite sure that the market participants and analysts will again become certain that sub-$1,000 prices will be seen, and you can take that cue to start looking for the next major rally to begin.
Avi Gilburt is a widely followed Elliott Wave technical analyst and founder of ElliottWaveTrader.net, a live Trading Room featuring his intraday market analysis (including emini S&P 500, metals, oil, USD & VXX), interactive member-analyst forum, and detailed library of Elliott Wave education.