The Trend Is Not Always Your Friend

The probability of "the low" being in place for silver is extremely high...

by David Brady via Sprott Money

Sentiment is an extremely powerful tool, especially in an emotional market like Gold & Silver. It is one of the best "contrarian" tools in my process. When sentiment is at extremes, it typically means that a turn is coming for the metals. Back in March 2021, when Gold was approaching 2079, just shy of the peak of 2089 in August 2020, I posted a word of caution that the risk-reward was significantly skewed to the downside. Three days later, Gold peaked.

I did the same thing in July 2020, when I forecast that Gold would peak in August. The rest is history. Extreme euphoric sentiment was key to both recommendations and many others both at peaks and troughs.

While sentiment is just one of the tools I use-alongside Fundamentals, Inter-Market Analysis, Positioning, Elliott Wave Theory, and classical Technical Analysis-it is a key component to identifying pending turns in the market. I say this because both Gold and Silver are coming off extreme bearish lows, and in Gold's case, the most bearish since the low of 1167 in August 2018.

Focusing on data, while others focus on eloquent opinions or bias, is a far superior strategy when it comes to precious metals. Hence I get a lot of emotional pushback when I turn bearish at peaks and bullish at troughs. Right now, the vast majority of analysts and traders continue to only look down. This is not surprising given the two-year dump in precious metals that feels like ten years. However, this is clearly just emotions doing the thinking and talking. But emotions are the death of wealth. The data says otherwise, as it does at every prior peak and trough, but few learn or remember.

Extremes in sentiment are typically excellent timing tools too, signaling both extreme bullish peaks and bearish troughs, and even positively divergent lower lows and negatively divergent higher highs, which are especially powerful in conjunction with similar signals from technical indicators like the RSI or MACD. The only time sentiment breaks down from a timing perspective is when there is a strong trend under way, either up or down. Sentiment can remain extreme bearish or bullish for months before it matters when such trends are in place. Fortunately, this is a rare occurrence. At the same time, trend followers can get caught off guard by a major turn in the markets by continuing to follow a trend, especially in its late stages. I believe this is what we're seeing now.

There are plenty of tweets out there right now calling for Gold to fall to the 1300s, even as low as 1000, and Silver to fall back to 11 or single digits. While anything is possible, I consider this nonsense when I look at the data, much of which I shared in my article last week. In fact, it just reinforces my contrarian bullish posture that the bottom is in for both Gold and Silver.

In saying that, there is no way to be sure one way or the other, and while indicators such as sentiment are fantastic forecasting tools, price is all that matters in the end. This is why I recommend waiting for a break of resistance, followed by a higher low and a higher high, to confirm that the low is in and that the trend has turned to the upside. This confirms what the data has been signaling and reduces the risk of further losses to the downside by going long too early.

Now getting to the point today. Silver has led the way off the lows this time around, which is not surprising given that the Gold:Silver ratio hit 100 again and was due to turn down.

Now it's Gold's turn to play catch up.

Silver hit a low of 17.40 back on September 1. It rallied to 20 next, followed by a pullback to 17.89. From there, it soared to break resistance at 20 and 20.87, the prior peak, reaching a high of 21.31 on Tuesday. Now we have a higher high at 21.31 and looking for a higher low anywhere above 17.40. Should we get that higher low followed by a break above the 200-DMA at ~22, the probability of "the low" being in place is extremely high.

Gold bottomed at 1622 on September 28. It broke resistance at 1700 but has now stalled at ~1740, the 50-DMA and prior resistance. Gold needs to establish a higher low next, anywhere above 1622, followed by a higher high, preferably above 1824, the prior peak and the 200-DMA. Should that occur, "the low" is very likely in place and the trend has turned up.

At the end of the day, it's all about probabilities. Anything is possible. But anyone telling you something is 100% certain is lying or talking their book, or both. This is especially the case when they become blinded by the previous trend. These are the same people caught short at the troughs and long at the peaks.

All of the data I follow is coming off multi-year extremes and pointing up. I'm only waiting for confirmation that the Fed is going to scale back or pause their tightening cycle. This is the time to consider going against the herd-but wait for confirmation before doing so.