Friday, September 18, 2009

Golden Breakout?

I was expecting Gold to provide another buying opportunity before it rose to new highs. I don't trade Gold, I own it. I buy more on weakness when I have the capital to do so. I missed the latest buying opportunity because I was waiting for a better price. I am not mad I missed this opportunity, as other opportunities will arise in the future.

I think that Gold is on the verge of a major break-out. That doesn't mean it is going to happen, but the odds are certainly getting better. There are a few things that argue against a Gold break-out here but that doesn't mean it won't happen. In no particular order, here are the common arguments against Gold breaking out right here and right now with my devil's advocate reply in parentheses:

* Gold is overbought on momentum indicators (only on a daily chart, not on a weekly or monthly chart)
* There are too many bulls and sentiments reading are too high (this can persist for weeks before a trend change and large moves can be made in Gold during short periods of time)
* The "commercial" category of traders (i.e. the large Wall Street firms like Goldmun Suchs that are always net short Gold) are heavily short Gold right now (see chart below)
* The U.S. Dollar is about to make an intermediate term bottom (I believe this is true but don't know exactly when it is going to happen and a rising dollar does not preclude a rising Gold price)
* The IMF announced physical Gold sales (Yawn. This is bullish, not bearish, as it shows the desperation of apparatchiks trying to keep the Gold price "contained"!)

I don't know what's going to happen to the Gold price here. But Gold is the strongest bull market out there right now. Stocks, corporate bonds and commodities all broke down significantly during the Great [Fall] Panic of 2008 and interrupted their long-term trends in a significant way while Gold did not. The U.S. Dollar has been in a bear market for 9 years now with an end not currently in sight (countertrend bounces aside). U.S. federal debt/bonds also remain in a bull market, but yields aren't going to go significantly below zero for any length of time, so the upside here is quite limited in short-term bonds and long-term bonds are a dislocation event waiting to happen.

Sometimes, bull markets move higher because they want to move higher. Bull markets can ignore changes in fundamental conditions, ignore technical analysis and overbought conditions, and shake off those who try to short them. "The trend is your friend" and Gold is one of the only markets in a clear, indisputable long-term bullish trend.

Anyway, below is a 5 year weekly chart of the Gold price using a log scale. Two things I have added to the chart include the open interest (i.e. number of open contracts) in the COMEX Gold futures market (i.e. Commitment of Traders [COT] report) at the early stages of Gold breakouts and the mention that Gold rose along side the Dollar in 2005 (i.e. both went up at the same time) versus the more typical "Gold up, Dollar down" move in 2007 to remind Gold investors that a rising dollar is not the death of an up move in the Gold price.

So much for the recent COT reports being bearish for Gold.

Gold closed at a new all-time weekly high today. That's right, an ALL TIME NEW HIGH IN NOMINAL TERMS FOR THE GOLD PRICE ON A WEEKLY CLOSING BASIS. This is psychologically important and cements the $1000/oz. Gold price in investors minds as a "reasonable" price for Gold. Once $1000/oz. becomes the floor for the Gold price, $2000/oz for Gold is not a great leap of faith for most investors. Until the Dow to Gold ratio reaches 2, I won't even be thinking of selling any physical Gold but I will continue to try to accumulate more on weakness.

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