Sentiment Speaks: Be Careful - Something Is Wrong With The Gold Market

There are many fallacies about the gold market that are constantly perpetuated.

Gold is not a "safe haven" asset from stock market volatility.

Expectations for 2020 is quite strong.

I don't know folks. I do a lot of reading in the gold complex, and I am just sitting here scratching my head. Something just does not seem to be right.

When the gold market began to rally back in the fall, it coincided with the stock market top we were calling for at the time, along with the strong decline into the end of the year. So, of course, all we heard was that investors were buying gold due to its "safe haven" status.

Well, since the end of December, the stock market has been on a tear during its two-month 450-point rally. Yet, gold has continued its climb during that time. In fact, if you look at the time from the bottom it struck in the fall until the end of December, and compare it to the rally seen since the end of December, it has risen almost in equal amounts during those equal two-month periods.

It clearly begs the question: "safe haven from what?"

Yes, I know I harp on these types of questions all the time. But, too many investors believe what they hear from the media and pundits because it is regurgitated over and over. Yet, that does not make it true. This is clearly one of those common fallacies.

In fact, I have addressed this fallacy, along with many others in prior articles.

But, I do want to re-post the section of this article which presents the historical facts which should put this fallacy to rest for those who are being intellectually honest about this market in relation to its supposed "safe haven" status:

You see, the metals rallied quite strongly in early 2016, and we did not even have a stock market crash. In fact, as I warned would occur in late 2015, they rallied together. I bet many of you did not even think this is possible. Now, after you pick your chin up off the floor, you should also realize that this is not the first time this has occurred, nor will it be the last.

So, allow me to show you why only expecting an inverse correlation between equities and metals is just outright wrong.

We will begin with the 2007-2009 time frame, which evidenced the most significant period of market volatility since the Great Depression. Let's see if we can glean anything from the metals action in order to determine whether they are the safe haven everyone is selling you on.

We all know that the S&P 500 topped in October of 2007 and began an estimated 300-point decline into March of 2008, and then we saw a corrective bounce in the equities for a couple of months, before it continued to head down. During that same period of time, even while the markets were heading lower, the metals continued to rally strongly. Here we have "evidence" of precious metals supposedly rising during a period of market volatility.

But, when we then look toward the May 2008-March 2009 decline in the equity market, we have clear evidence that the metals also experienced significant declines within that time period. In fact, gold lost a little more than 30% during that time period. So, here we have a period of time where the metals were moving in the same direction as the equity markets, and clearly not acting like a supposed "safe haven."

But gold also found a bottom and began to rally four months before the equity markets, after which time, they began to rally together again for two years.

So, when one is presented with these facts, does it make sense that the metals are surely going to rise during periods of market volatility? Are metals really the "safe haven" everyone believes they are during down markets? Are these markets inversely correlated as so many claim?

If you need further evidence, consider this additional fact. Back in 2008, the folks at Elliott Wave International published a study that showed that in 10 out of 11 recessionary periods since 1945 gold experienced a negative total return.

For further evidence that one should not assume the two markets move inversely, one simply has to look back to the period of time between 2003-2008. During those 5 years, the metals rallied alongside the equity markets. And, no, this is not a misprint.

So, when one is presented with these facts, can you really believe that metals are the "safe haven" everyone claims they are during down markets? Can one also come to the conclusion that these two markets trade inversely with each other? So, should you be buying metals only because you believe the stock market is going to crash?

As far as GLD is concerned, as long as the 122 region is held as support during the current pullback, it seems to still need a 5th wave up towards the 130 region. But, based upon the structure and the technical signs I am seeing, that really should put a lid on the GLD over the coming months, with a break down below the 122 region suggesting that it has moved into its final pullback before the larger degree 3rd wave rally, for which we have been awaiting for the last several years, finally takes hold.

After that pullback completes around the summer time, my minimum target for the next major rally phase in the GLD is 138, with the 145-150 region being my preferred initial target. We will best be able to determine the appropriate target once the pullback in the coming months completes.

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Disclosure: I am/we are long PHYSICAL METALS AND VARIOUS MINING STOCKS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.