Sentiment Speaks: Investors And Analysts Know Nothing About Gold

The manipulation theorists have more fodder due to a recent development.

Manipulation did not cause the standard market correction between 2011 and 2016.

Market sentiment is the main driving factor in the metals market.

There were several developments in the gold market this past week. First, we heard of another trader who has pleaded guilty to "manipulating" the metals market. And, everyone is up in arms again about how gold was manipulated to drop from $1,921 to $1,040 during 2011-2015.

And, yes, they are all again saying "ah ha - you see, we were right."

But, as I have said so many times before, what this trader did was akin to a paper cut in the market. And, to claim that these types of actions caused the market to drop from 2011 to 2016 is akin to claiming that a paper cut caused the market to bleed to death.

Specifically, it was noted that this trader pleaded guilty to "spoofing."

This trading strategy was admittedly intended to inject materially false and misleading liquidity and price information into the precious metals futures contracts markets by placing the Spoof Orders in order to deceive other market participants about the existence of supply and demand.

The Spoof Orders were designed to artificially move the price of precious metals futures contracts in a direction that was favorable to Edmonds and his co-conspirators at the Bank, to the detriment of other market participants.

But, as the courts have highlighted in all these "manipulation" cases, these small degree manipulations occurred in both directions. Please read that again. These small degree manipulations occurred in both directions. So, if you really believe you have found another smoking gun to believe you were manipulated out of your profits due to the 2011-to-2016 market decline, think again. If you would like a more in-depth discussion about this issue, I have addressed it in the past here.

Next, I recently read an article claiming to provide us with the holy grail as to what to look for when a bottom is being struck in gold. And, what amazes me is why these same analysts have never been able to recognize the bottom or top in gold in the past despite their holy grail. Rather, they are always certain that lower levels will be seen when we bottom and are equally certain that higher levels will be seen when we are at a top.

There is one thing that will alert you to a top or a bottom, and that is extreme sentiment. That has been the only consistent factor that has alerted investors to a top in the market, or a bottom in the market.

For example, based upon my sentiment analysis in 2011, I said that "[a]gain, since we are most probably in the final stages of this parabolic fifth wave 'blow-off-top,' I would seriously consider anything approaching the $1,915 level to be a potential target for a top at this time."

And, then in 2015, I wrote:

As we move into 2016, I believe there is a greater than 80% probability that we finally see a long term bottom formed in the metals and miners and the long term bull market resumes. Those that followed our advice in 2011, and moved out of this market for the correction we expected, are now moving back into this market as we approach the long-term bottom . . . We are now reaching our ideal target region, and the pattern we have developed over the last 4 years is just about complete. . . For those interested in my advice, I would highly suggest you start moving back into this market with your long-term money . . .

And, yes, this was all based upon extremes in market sentiment, and not some form of reasoning or manipulation.

In fact, back in the last quarter of 2015, we opened a Miners Portfolio, and began buying some of the major mining stocks at the time, such as Barrick Gold (NYSE:ABX) within the $7 region, which then rallied to more than triple our entry less than a year later. And, even though we have had a two-year pullback in the ABX, it is still almost double of our initial entry. How many assets do you own today that are almost double of the price you paid for it two years ago?

At the end of the day, reason or manipulation is not what you need to be concerned about when it comes to gold. Rather, you need to be watching for extremes in market sentiment. That will tell you when you buy and sell.

And, if you would like more information on how we track market sentiment, feel free to read the series I wrote about it: "This Analysis Will Change The Way You Invest Forever", parts one, two, three, four, and five.

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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.

Additional disclosure: I also own hedges for the potential of lower lows coming.