Ignore The Fed When It Comes To Gold

It has now been drilled into the public’s mind that the raising of the interest rate by the Fed will be negative for gold, as it will cause gold to drop.  This has become the “latest and greatest” new perspective in the market. 

But, does everyone remember the last majorly accepted perspective in the metals market and how that turned out?  Yes, that one was about QE supposedly causing gold to skyrocket to the moon.  How did that one work out?  Well, when you consider that gold and silver tanked not long after QE3 was announced, should we now consider the “Constanza approach” to market analysis I have been touting:  doing the exact opposite of what you think would be right?  Does it mean that QE3 “caused” gold and silver to tank since they dropped when QE3 began?

Go back two years in time and consider what you would have thought if I had said that QE3 would cause gold to tank?  It would not make any sense, would it? Well, I still don’t think it makes any sense even though some actually point to such a correlation as the cause of gold dropping.  I want to state this as clearly as possible:  QE3 did not cause gold to tank in the same manner that QE would not cause gold to rise.  QE is a non-factor when it comes to gold and, believe it or not, so is the Fed.

Yet, many still want to attribute Fed action as the driver of gold and silver.  And, to all those that actually invest in this manner, I wish you luck, as you will need it, along with your “hope.” 

People continue to pour over the Fed statement month after month to glean what they can about the direction of the metals based upon the Fed’s perspective.  Yet, not only has it been a useless endeavor, the market even made fools of those that attempted such “analysis.” 

A little over two years ago, I was warning against trying to use Fed statements to trade the metals.  Specifically, I noted that, as the Fed was publishing the exact same statement month after month (without changing even a comma), people were trying to figure out the price direction for the metals from such statements.  But, what was so interesting was that we would see 10-15% moves in silver in BOTH directions right after the Fed announcements.  Yes, the exact same Fed announcement supposedly caused 15% price movements in silver in the exact opposite directions.  One month, the statement would supposedly cause silver to rally 15%, and the next month the exact same statement would supposedly cause silver to drop 10%.  Makes sense, right?  Yet, many still continued to pour over those statements month after month not even recognizing the folly in such useless endeavors.

Imagine the backlash I received when I began to publicly suggest shorting silver not long after the QE3 announcement was made.  It was like I was speaking a different language or I had come from Mars.  One could even consider it akin to blasphemy at the time.  I mean, to consider trading against the Fed!?  Yet, as we now know, silver lost over 50% of its value from that point in time, and it was clearly the correct call. 

But, people still did not learn their lesson.  Even to this day they continue to view Fed action as the major factor to consider when attempting to discern the direction of the metals.  It astounds me how investors never learn, and simply accept what is suggested to them by those writing articles, or those speaking on television, as gospel.  Have we lost the ability to think critically on our own?  Have we lost the ability to question what we are told based upon the actual facts?  Or, have we simply adopted the “Foghorn Leghorn perspective:”

“Don’t bother me with facts, son. I’ve already made up my mind.”

So, let’s look at recent events.  Again, many believe that the Fed’s raising rates will be death knell for gold.  But, wait a second.  This past week’s jobs report was quite good, which increased the market’s expectations that the Fed would go through with their intended rate raise.  So, gold must have dropped on Friday, right?  Well, gold rallied over 2% or $25 on Friday.  So, it was not exactly what was expected based upon the common conception of the metals driver.  Is the “Constanza approach” starting to sound more appealing?

Now, I am not saying that gold will or will not drop when the Fed makes its December announcement.  We will follow the market sentiment indications at the time to tell us what to expect.  But, I can assure you that the substance of the Fed statement will not provide us dispositive clues as to the main direction for gold.

I know many of you think I sound like a broken record already, trying to explain that market sentiment is what drives the metals all the time, and it is not affected by exogenous events in the manner most believe.  Those that have come over to the dark side with us have done quite well over the last number of years.  Those that have been fighting us have not.  So, rather than continue to say the same thing over and over, I will simply post the perspective in R.N. Elliott’s own words:

“The causes of these cyclical changes seem clearly to have their origin in the immutable natural law that governs all things, including the various moods of human behavior. Causes, therefore, tend to become relatively unimportant in the long term progress of the cycle.  This fundamental law cannot be subverted or set aside by statutes or restrictions.  Current news and political developments are of only incidental importance, soon forgotten; their presumed influence on market trends is not as weighty as is commonly believed.” 

Just something to think about.

Avi Gilburt is founder of ElliottWaveTrader.net.