More Fallacy/Gold and Interest Rates
Trader Scott’s Market Blog
February 5, 2017
It’s baffling….baffling, how so many completely unsupported market theories persist. There’s a trendy one to discuss in a bit which always appears when gold is weak, and it’s used to support the case why the price will fall. The thing about these theories about markets is they are always trend-related. Meaning the trend actually causes the “trendy” theory of the day, the theory doesn’t cause the trend, but it does reinforce the trend. These theories are used to “explain” “why” a market is going up or down, because gosh, we can’t make money unless we know (after the fact) why a market is moving. In other words, when the consensus view of a market is up (perceived or actual), and especially when it’s strongly up, certain theories are trotted out. And the same for a downtrend, especially an apathetic and/or hated market, like gold in late 2015 (again perceived or actual). The reason for saying perceived or actual, is because 90% of the people don’t recognize (or refuse to believe/accept) a market has generated a major top or a major bottom until well after the fact. So these former theories will even persist after the top or bottom is in, and these theories will then cause people to incompetently invest based on the old theory. And the fact that the old theory was false to begin with doesn’t even matter. Like the money printing theories used (started?) by the gold scam artists/sellers to get people to buy gold into 2011, but especially leading right into the big September highs. Because the big push higher got the weak hands to believe in the useless theories about “why” gold was going up, and why it will continue to soar. And after the top, the same theories about QE, and US Treasury debt, were still used to buy, buy, buy every selloff after the huge top. Of course the selloffs were blamed on manipulation – what other reason could there be? But notice these scam artist have been proven dead wrong, and have lost a lot of credibility. Why? – because the downtrend in prices caused people to lose faith in the old theories. The theories weren’t “working”. Why weren’t the theories working anymore? Because the prices were falling. It’s the market movements, or trends, which generate the news and the theories about “why”, and it’s the public buying which reinforces the theory. And it works until it doesn’t.
Why is it that at major market bottoms, there is a barrage of bad “news’, and the opposite at a top. The market moves generate the slant of the stories. But even though a lot of bad “news” is no guarantee of a bottom being in place, the bottom will certainly be accompanied by a barrage of bad “news”. And after the bottom is well in place, then the reverse happens – the old theories used as the excuse during the downtrend about “why” we shouldn’t buy will continue to persist. Until the uptrend starts changing the narrative, and the new theories slowly take hold about “why” the market is going up, therefore “why” we should buy – reinforcing the theories in a big loop. The scam artists in gold will be back in full force eventually, as the rising prices are what get people to “believe”. So according to the gold seller scammers, the falling prices are “caused” by manipulation, yet the rising prices are “caused” by their favorite theory of the day. Instead of using the extremes in the falling prices and the scariness to step up and buy, people believe in the manipulation theories and avoid the incredible buying opportunities. But fast forward, and then the rising prices “confirm” the theories and therefore it’s a sure thing to buy. Wow. Why do people do this to themselves time after time? So hopefully my contribution, and a few other folks who are doing great work, will get some people to view markets in a more rational and sane manner.
And we can’t let the gold permabears off the hook. They get very boisterous and confident into the big selloffs in gold. They were out in full force late last year, but the rally has shut them up a bit. And in late 2015, we heard all of their absolutely moronic comments about gold right into the best buying opportunity since 1999. Like this genius from the esteemed WSJ calling gold a “pet rock”. And this clown actually writes a column for the esteemed WSJ which is called “The Intelligent Investor”. Seriously? But these bearish theories will continue to be trotted out, because once again on the other side, 90% of the people won’t recognize/accept the gold bull market until well after the fact – and then some new theories will emerge. But the one trendy theory which has been used for years is “gold goes down when interest rates are rising”. It was trotted out several times into the weakness in December. And it will be used again in the next selling wave. But here are the facts (and there will be an updated extensive post on this soon about interest rates and gold prices) about one of the most spectacular examples of a totally useless theory about gold and interest rates: in February, 1971 to July, 1974, the Fed went on a rate increase binge -they raised rates 10% points, and yet gold rallied from around $40 to around $200. And of course gold then fell as the Fed dropped rates. Someone should tell the WSJ and its’ “Intelligent Investor”.
Lastly, look at this classic article from the esteemed WSJ on 12/14/2015 – three days prior to the secular low in gold: The prospect of a U.S. interest-rate rise has heaped pressure on metal prices since the summer, but an increase this week won’t spell the end of the pain being felt by gold, copper and other metals.” So the esteemed WSJ couldn’t see the high probability of a huge secular low in gold (and commodities) sitting right in front of their Wall Streetered noses. The Fed was meeting on the 15th and the 16th – the bearishness about gold was mind boggling. And contrary to the WSJ’s hit piece on gold, my belief then, was it was finally time to buy. Maybe we need to keep an eye out for when the Intelligent Investor turns bullish on gold. Don’t hold your breath.
About
Trader Scott has been involved with markets for over twenty years. Initially he was an individual floor trader and member of the Midwest Stock Exchange, which then led to a much better opportunity at the Chicago Board Options Exchange. By his early 30’s, he had become very successful in markets, but a health situation caused him to back away from the grind of being a full time floor trader. During this time away from markets, Scott was completely focused on educating himself about true overall health and natural healing which remains a passion to this day.Scott returned to markets over fifteen years ago where he continues as an independent trader.
about why the market is going up slowly take hold, therefore we should buy.
'Trader Scott’s Market Blog – More Fallacy/Gold and Interest Rates – February 5, 2017' have 21 comments
February 6, 2017 @ 8:30 am traderscott
Both gold and the $ are rallying today. There have been a bunch of posts talking abouy 2017 as being the year where they would both begin to rally together, Europe is a disaster. I kept repeating in the comments section the US$ breaking below 99.40 with ending action, would be the first really good spot for the low of this bigger reaccumulation area. It did that. So we’ll see about this, but the gold and the $ being in sync needs to be watched.
February 6, 2017 @ 10:30 am Easy Al
Hi Scott,
You nailed it.
The column linked below listed some periods during which gold and dollar moved up together. http://www.gold-eagle.com/article/dollar-gold-relationship
February 6, 2017 @ 10:47 am Easy Al
The article has some good discussions on the impact of the (real) interest rate, yield curve and credit spread on the price of gold. http://www.gold-eagle.com/article/relationship-between-gold-interest-rates
February 6, 2017 @ 11:45 am traderscott
And all 3 will be in effect + inflation. Bullish situation long term, it’s just all of the market weirdness in between. It’s the weirdness which has a big potential to screw up a good plan, and that’s how our accounts get into trouble. It’s great to have a long term plan, but very few can stick with it when the market does the completely natural process of going against our plan for an extended period. That’s when we question our plan, and usually at around the time when we should be buying – i.e., the WEIRDNESS of markets.
February 6, 2017 @ 11:12 am traderscott
Good link EA, the post is from ten years ago and Steve did a good job with it. Obviously a lot has changed since then, but the fact remains that this gold/US$ relationship is not at all exact. He referenced a gold/Franc relationship. I don’t expect that to hold either. It’s going to be all these currencies vs. gold which will break. For my outlook, gold and the $ will “need” to rally together. Just watch China, Japan, and especially the crappy Europe. The $ is the reserve currency. Where all of these ideas about hyperinflation in the US come from is baffling. The $ will lose its’ reserve status, but first it will be an unofficial downgrade. The official downgrade is way in the future, but that’s when we would even remotely start pondering hyperinflation in the US$.
February 6, 2017 @ 11:49 am David V
I really don’t understand the dynamics of how GDX and GDXJ can keep gapping up on such low volume, they are relatively high compared to the PM price.
February 6, 2017 @ 12:32 pm Easy Al
Adam Hamilton publish very good week columns on precious metal. The HUI/Gold ratio chart in this column will probably answer part of your question: http://www.321gold.com/editorials/hamilton/hamilton010617.html
February 6, 2017 @ 12:40 pm traderscott
They’re melting up, the low volume rallies into higher areas, and with a stronger $ to boot (also). It makes timing much tougher than the volatile areas. These are the times we want to just be buy and hold. And then there are the volatile swing areas when we want to be traders. Very rough business dealing with this stuff. And this gold thing is more of a micro-basis, but on a big picture, the stock market has been doing the meltup for years, and people keep saying it’s bearish.
February 6, 2017 @ 1:59 pm David V
The strong hands can hold on to the shares, I wouldn’t know the top if I banged my head on it, never believed in the miners all sustaining costs, prefer to sit it out and wait for a pull back.
February 6, 2017 @ 3:44 pm Rob
Speaking of which, Scott, are you still expecting a pull back in PM’s? I have sold a lot of my position and am pondering whether to get back in, but seems strong at the moment and I hate that.
February 6, 2017 @ 7:43 pm traderscott
Hey Rob. You know my approach, and no I myself am not buying now. Yes there will be backups. That’s why I did the 2 posts “Different Buy Points in a Bottom” – to give perspective. I keep talking about the day to day weirdness in markets. It’s what gets us off focus, away from our plans, and we constantly have to reel ourselves back in. Do you believe we’re in a major uptrend? Then buying backups is the best IMO, but not only, approach. A few emails have come in concerning missing the move. And my reply was to buy a bit, but save capital for the backups. It can provide a little calmness then. It’s tough to imagine with this rally, but there will be a selloff again. At the new site, there can be more real time conciseness, but there are intraday comments at posts here, giving my feelings for the setups – from 1/27 right before the open about gold and the US$, with the original charts:
As for PMs, the bigger backups continue to be buys all thru this first quarter, as I laid out last month. Silver is continuing to do good work to break thru 17.30. That area will still see battling, but it will eventually get thru. And once again in gold, the sell stop runs, followed by the bounces are in full force. Hedge funds, etc. getting taken out, and then the bounce. But each break of support continuing to build the bearishness, to reset the sentiment, which wasn’t that bad at the $1220 resistance anyway. So we had the sell stops at 1210, 1206, 1200 of course, 1195 which set up 1192 as support, then 1187 and the bounce of course. And now the most re-accumulation since the break from the highs. This is building bearishness, and that’s good.
And this about the US$:
To watch pure support and resistance in action, just pull up an intraday $ chart, like this one. There’s the gap being filled at 100.70 – the resistance area. And the bigger resistance at 101.70, and even bigger resistance at 103.60ish, with the range at the highs with the series of resistance areas, and the places to cover shorts on the breaks, if you’re a short term trader. Or if you had a belief in a bigger top, just cover some into the breaks and keep some short, and short more back into resistance. And the support area formed off the sell stop runs below 100.30. And when it broke below 100.00. And the selling climax at 99.83 and the retest. But always keeping in mind what is going on in the bigger sense, which is in my mind a reaccumulation to break thru 103.50. The support at 99.40 is sticking out like a sore thumb. There are alot of ways of doing this business, but the TREND, SUPPORT/RESISTANCE, and ACCUMULATION/DISTRIBUTION are powerful tools certainly. It’s just about getting our own time frames in order, and not letting ourselves veer from that timeframe. Because it then becomes very confusing.
February 6, 2017 @ 5:06 pm David V
Finally got a buying stampede today, I think gold is heading to 1250 but the hook was set today.
February 6, 2017 @ 8:25 pm Easy Al
From November 9 to January 31, the gold asset of GLD dropped from 955.0 to 799.1 tonnes. During the period, there were only two days on which the tonnage moved up. It appears that the selling has turned into buying now. Since then, the tonnage of GLD increased each of the last 4 trading days, which brings the holding to 818.7 tonnes. In addition, the CoT report of last Friday to see the increase of 12,388 contracts of net long by speculators over the previous week. It will interesting to see if the purchase continues.
February 6, 2017 @ 8:46 pm traderscott
It has continued, at least thru today. And thank you for the GLD update. Where was it at the 7/6 top?
February 6, 2017 @ 8:35 pm Rob
Thanks Scott! You are awesome, and I will look forward to your site going up. It is fascinating to see myself making all the classic mistakes like “missing the move” and all that. But you asked whether I think gold is in a long term uptrend – honestly, I dont know any more. Trump has me unsure, I am mostly concerned about the tariffs and other measures he says he will put in place creating a dollar shortage in the world. I think gold can only go up long term if the gold/dollar and gold/dollar-yen correlations can be broken, or if people start moving away from dollar as an international currency (not holding my breath on that one, but if anyone can make it happen then it’s Trump!!). I respect your view that these correlations likely will break, but I myself dont have the experience to tell, and again I am concerned about the strength of the HFT’s to enforce the correlations way beyond what we might expect. Unknown territory. So at the end of the day – I really have no idea :). As you say have said many times, its about assessing probabilities and risk. I just feel a bit out of my depth right now when considering the long term perspective.
February 6, 2017 @ 8:55 pm traderscott
If you’re that unsure, which is perfectly fine Rob, then definitely buy ONLY into bigger reactions (to cut risk) and keep your position size small. Because no one has a crystal ball, except for Cramer.
February 6, 2017 @ 9:52 pm Easy Al
Scott,
As you implied, the highest gold asset of GLD in the past 12 months was on July 5, 2016. The tonnage on that day was 982.7 tonnes. During the correction of gold and miner from July 5 (or August 2 for miners) to November 9, the asset of GLD was fairly steady, dropped only about 27.7 tonnes.
The highest holding of GLD is 1353.4 tonnes, which occurred on December 7 & 8, 2012.
February 6, 2017 @ 10:09 pm traderscott
Awesome – gives us some perspective.
February 6, 2017 @ 10:09 pm traderscott
Awesome – gives us some perspective.
February 7, 2017 @ 1:19 am Easy Al
The big sell off in gold and miners since November 10 was presumably triggered by the announcement of Druckenmiller on crap TV that he had sold his entire gold position after the election of Mr. Trump. Well, it seems that he has bought back his entire gold position. http://kingworldnews.com/alert-hedge-fund-legend-multi-billionaire-stanley-druckenmiller-has-bought-back-his-gold-position/
February 7, 2017 @ 1:36 am traderscott
Yes EA, did you see my original post about Stan on crap TV? I’m actually working on an update to the original post right now – should be up soon.