Monday, March 29, 2010

Gold Correction Has Done It's Job

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The job, of course, being to wash out weak hands. These hands generally consist of the public and momentum chasers/hedgies/short-term chart jocks. The public, in aggregate, always hates any asset class that is falling, rather than seeing it as a buying opportunity. Chart jocks migrate toward trending markets, and corrections are what happens when the trend takes a breather.

This snippet from a current commentary by Adrian Ash from caught my attention:

"As a proportion of all open gold futures and options contracts, the net long position held by hedge funds and other large speculators fell to 11-month low beneath 30%."

Couple this with the current chart (data thru Friday's close) of the Rydex Precious Metals Mutual Fund total assets held data over the past 1 year. The total assets in this precious metals fund is a proxy for retail investor interest in the Gold patch and the lower the plot line, the lower the total assets held by the fund and thus, the lower the public interest (obviously an imperfect proxy, but a good one nonetheless):

So, if momentum chasing hedge funds and the public aren't interested in the Gold patch, who is? STRONG HANDS. These are the folks with more patience who buy the dips and create the bottom of every correction. I wonder if these folks ever leave footprints for we ants to see? Perhaps a recent 4 month chart of the GDX ETF might help:

Anyone claiming to be a contrarian in the Gold patch should have been buying over the past 2 months. Since the public and professional momentum chasing crowd is not in this fledgling Gold sector up trend yet, there is plenty of upside potential ahead in my opinion. We are also moving into the "silly season" (i.e. the April-May time frame) as Bob Hoye calls it, when animal spirits in the markets tend to run high. I think those spirits are going to migrate from the general markets into the precious metals patch (again) and create another big move higher. Once everyone is convinced the precious metals market is going to the moon, the strong hands will sell into the frenzy and create the next top. Wash. Rinse. Repeat.

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