Gold Was Primed to Rally. Then, Things Turned on a Dime (Well… 3,000 dimes to be exact!)

In March, gold's "fundamental" backdrop was stacked with bullish factors. In the 2 months after, prices changed by $300 -- and not in bulls' favor!

by Nico Isaac
Updated: June 29, 2022

In the late 1990's, the Bureau for At-Risk Youth launched what, at the time, seemed like a brilliant marketing campaign. They branded hundreds of thousands of #2 pencils with the slogan "Too Cool to Do Drugs," and distributed them to schoolchildren throughout the United States.

According to news reports, sometime into the campaign, a 10-year old student pointed out an inherent flaw in the slogan; namely, once the pencils were sharpened down to a certan point, they read "Do Drugs."

Promptly, the pencils were recalled!

Now, what about the popular slogan that's been branded into mainstream financial analysis since the time of the Buttonwood Tree Agreement? It says: "News Moves Market Trends," and is distributed throughout the "smart money" schools from Wall Street to High Street.

If you sharpen this idea down a few pegs, though, you'll also find a glaring flaw, one EWI founder Bob Prechter revealed in the 2004 conversational journey Prechter's Perspective:

"Sometimes news appears to fit a day's trading so perfectly that everyone 'knows' the cause of the day's move. Other times the market does the opposite of what everyone would have expected. This unreliability proves that news is not determining the trend."

Take, for example, the recent performance in gold. In early March, gold prices were on a tear, soaring above $2000 per ounce for the first time since 2020. They stood within spitting distance of all-time highs and, according to the mainstream experts, three bullish events or "fundamentals" all-but assured gold prices would continue to shine.

First, the looming spectre of recession, and its proxy, rising interest rates. Wrote Mining.com on March 11:

"Gold likes recessions -- could high interest rates lead to one?

"There are many regularities in nature. After winter comes spring. After night comes day. After the Fed's tightening cycle comes a recession. This month, the Fed will probably end quantitative easing and lift the federal funds rate

"What does it mean for the gold market? Well, the possibility that the Fed's tightening cycle will lead to a recession is good news for the yellow metal, which shines the most during economic crises."

Second and third: The ongoing war in Ukraine and its safe-haven stoking companion, inflation. From Reuters on March 8:

"Gold makes run for record high as Ukraine concerns, inflation risks mount

"Investors are piling into the precious metal as the ongoing crisis worsens. Gold is often seen as a safe-haven asset in times of market turmoil, because it retains its value during a time of crisis.

"Once $2,000 an ounce is cleared, the path to $2,100 will be laid open."

And yet, despite the bullish cards being stacked in gold's favor, the precious metal peaked on March 8. In just over two months, gold plunged $300 per ounce into May 16 and has been treading water since.

Amidst the donwtrend, gold's headlines did an about face. The same "fundamentals" just cited as bullish for bullion -- recession, inflation and war -- were now hailed as bearish. See:

• June 26 CNBC: "Gold Dips on Weaker Dollar, Recession Risks"
• June 27 Barchart: "Gold Loves Inflation But Hates Higher Rates"
• June 16 Oilprice.com: "Gold...Prices Slip Despite Soaring Inflation"

Like those misbegotten number 2 pencils, we believe it's time to recall the flawed, news-driven message of financial markets. Fortunately, we have a replacement: the Elliott Wave Principle. This technical model of market analysis has this radically different message:

Investor psychology drives market trends and unfolds in recognizable Elliott wave patterns directly on price charts.

Returning to gold, we turn to our Short Term Update on March 9. There, our analyst identified the rally off the January 2022 low as a complete second-wave correction. The next move of significance, therefore, was a powerful third wave decline. From STU:

"In this scenario, Primary wave 2 (circle) made a double top relative to the top at $2072.12 on August 7, 2020. Yesterday, March 8, gold pushed to $2070.29 intraday, less than $2 from the August 2020 high.

"Prices have declined $93.00 over the past several hours as gold volatility is soaring. The DSI Indicators is now at 95, the highest level in over two years, since February 21, 2020. At the same time, Large Speculators are net-long 47.2% of total non-hedging open interest, the most extreme net-long position in 5½-years, since September 26, 2016.

"...The sentiment and momentum extremes suggest a large decline is possible."

This next chart captures what transpired: gold's 14% selloff into May 16:

To put it one way: Friends don't let friends rely on "fundamentals" alone to navigate markets.

In Prechter's Perspective, Bob Prechter emphasizes the malfunction of this mainstream model:

"I think there's a place for fundamental analysis of individual companies, but I am firmly convinced that you can make a very rational argument showing that fundamental analysis applied to overall market timing is like reading the entrails of goats."

By contrast, one alternative speaks for itself:

"The Wave Principle proves itself when you merely keep a chart. The wave patterns are repetitive, and at times, over protracted periods, they are easily discernible."

In the end, trading and investing in financial markets carries risk. Elliott wave analysis, along with a tried-and-true arsenal of technical indicators, provides an objective frame to examine potential "windows of change" in the world's leading markets.

Right now, Short Term Update presents near-term analysis of near-term trends underway in U.S. stocks, metals, crude oil, bonds and more!