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It is now almost 14 years since I published my first public article on gold analysis. Back in August of 2011, I outlined my expectation for a top in gold at $1,915 even though it was involved in a parabolic rally at the time.
Well, needless to say, that gold article was not viewed favorably by readers at the time. In fact, I was summarily told in the comments section that I knew nothing about the gold or financial markets.
Yet, one brave commenter asked me where I foresee gold heading if it does top at my expected target. And, when I answered that I expected it could drop back to the $1,000 region he responded by chiming in as the others and telling me I know nothing about the gold or financial markets.
Well, we all now know that gold topped within $5 of my target and then proceeded to drop down to $1,050, where we actually called the bottom the night it struck that target. In fact, on December 30th, 2015, I published the following suggestion to public followers of my work:
“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 who 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. In 2011, before gold even topped, we set our ideal target for this correction in the $700-$1,000 region in gold. We are now reaching our ideal target region, and the pattern we have developed over the last four 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…” Fast forward 10 years and gold has now increased almost three-fold from the lows struck in 2015. And, while I do think we can still see higher levels over the coming year or so in the gold market, I am starting to see signs that we are moving into the final stages of this decade-long rally. For those that may not know me, I utilize Elliott Wave analysis as my primary analysis methodology. And, whether you believe in the method or not, it is a fact that we called the top to this market back in 2011, the bottom back in 2015, and our methdology has provided us extraordinarily accurate guidance over the last 14 years for which we have been publishing our gold analysis publicly. But, admittedly, we do not engage in Elliott Wave analysis in the same subjective manner as most who claim to be Elliotticians. Rather, we have created what we call our Fibonacci Pinball method as an overlay to the standard application of Elliott Wave analysis, which provides a much more objective framework for the standard Elliott Wave structure. This has provided us with much more accurate prognostications relative to the traditional application of Elliott Wave analysis. But, the basics remain the same. You see, Ralph Nelson Elliott identified almost 100 years ago that financial markets are fractal in nature, and move in a 5-wave structure during the primary trend and in a 3-wave structure during corrective trends. And, this method has allowed us to identify almost every twist and turn in the gold market during these last 10 years. Yet, many investors still follow the old, anecdotal drivers of the market, despite having been caught on the wrong side of the market many times over the last 15 years. If you remember back in 2011, when gold was rallying parabolically, most pundits, analysts and investors bolstered their beliefs that gold was going to substantially eclipse the $2,000 mark that year because of strong central bank buying. Yet, we all know that this belief was ultimately demolished when gold lost almost 50% of its value over the coming 4 years despite “central bank buying.” Amazingly, they have not learned their lesson, as they are all back parroting their old mantra regarding central banks. You see, most people will gladly accept what they read and hear as truth, without doing much testing as to its voracity. Kahaneman, in his book Thinking Fast and Slow, tries to explain this phenomenon: “A reliable way to make people believe in falsehoods is frequent repetition, because familiarity is not easily distinguishable from truth.” Moreover, he noted that “evidence is that we are born prepared to make intentional attributions.” In other words, our minds engage in an automatic search for causality. We also engage in a deliberate search for confirming evidence of those propositions once we hold them dear. This is known as “positive test strategy.” He went on to further note: “Contrary to the rules of philosophers of science, who advise testing hypotheses by trying to refute them, people seek data that are likely to be compatible with the beliefs they currently hold. The confirmatory bias [of our minds] favors uncritical acceptance of suggestions and exaggerations of the likelihood of extreme and improbable events . . . [our minds are] not prone to doubt. It suppresses ambiguity and spontaneously constructs stories that are as coherent as possible.” So, when you hear someone claim that central banks are going to power this gold rally for many more years to come, I suggest you put that claim through a prism of truth, and look at history as your guide. I have written about this before, but now may be a good time for a refresher history lesson on central banks and gold. All we heard between 2011 to 2014 was how bullish the gold market was because China and India were buying huge amounts of gold. Yet, gold topped at the time when central banks began their huge buying spree in 2011 and continued down for years during this buying spree. “Smart money” indeed. So, unfortunately, the facts do not support the commonly accepted proposition which seems to again be making the rounds. In fact, historically, it is more common to see countries buying their gold at the heights of the market, whereas central bank selling often marks the end of a bear market in gold. As an example, from 1999-2002, Great Britain sold about half of its gold reserves. But guess what happened after the sales? Yes, gold began its parabolic climb from just below $300 an ounce to over $1,900 within nine years. In fact, that bottom in gold became dubbed the "Brown Bottom," named after Gordon Brown, the U.K. chancellor of the exchequer, who made the decision to sell the gold at that time. You see, governments are usually the last actors within a sentiment trend. Think about it. Aren't governments enacting new laws to protect investors at the end of or after bear markets — after all the damage has already been done? So, it is not unreasonable to believe that governments would be the last sellers to the market to conclude a bear market. Moreover, it is common to see them as buyers when markets are near some form of high, such as they seem to have done during 2011-2014. And this is why I was expecting to see news of a government selling its gold reserves to represent the culmination of a selling trend ten years ago. Back in 2015, I read an article noting that Venezuela could be selling more than 3 million ounces of gold reserves before year-end. The country had more than $5 billion in maturing debt and interest payments due before year-end without the ability to repay it. While the 12 million ounces of gold sold by Great Britain at the "Brown Bottom" is clearly more than the 3 million ounces that Venezuela was considering selling, recognize that Great Britain's proceeds from its sale were estimated at around $3.4 billion, whereas the Venezuela sale would have likely netted around $3 billion. Additionally, back in 2015, the major players within the gold market turned bearish, some with reliance upon this central bank selling. At September's Denver Gold Forum in 2015, a panel of gold-industry experts came to a consensus that gold is still overvalued and would likely fall below $1,000, perhaps to around $800. Moreover, at the LBMA/LPPM gold conference in Vienna, an expert panel discussion on gold came up with almost an identical consensus. The panel also expected that gold will drop to below $1,000, and perhaps to $800 or less. Again, more “smart money!?” To add to this bottoming evidence, in early 2016, it became known that the Bank of Canada sold all the rest of its gold. Yes, you heard that right. Clearly, we have more evidence of “smart money” activity! At the time, I noted that “I would consider this akin to the "Brown Bottom" which marked the bottoming of gold back in 2002.” I further noted that “while 2002 became known as the "Brown Bottom," 2016 may yet become known as the "Maple Leaf Low." So, if you are looking to central bank buying as an indication of the strength of the market, you may want to consider that this is now evidence that we are likely approaching the end of this 10-year bull market in gold. While I still think there is some strength left in this market over the coming year or so, it is now time to be sleeping with one eye open towards the exit door should this top be struck even earlier than I expect. I know this will not be a popular perspective within the gold community, but I am not here to gain popularity. Whereas there have been times when I have been called a perma-bear in metals (2011-2015), and there have also been times when I have been called a perma-bull in metals (2016-2025), I simply am trying to honestly outline what I am seeing in my analysis. As one of my 1000 money manager clients once noted, I am neither a perma-bear nor a perma-bull . . . I am simply “perma-profit." Avi Gilburt is founder of ElliottWaveTrader.net, a live forum featuring our team of analysts covering a range of markets.
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