Traders and the Gold "Top"

Friday, March 02, 2007 | 05:36 AM

Last week's commentary, Gold Knows, engendered lots of comments by traders. Quite a few suggested that the post itself was marking the top in Gold, and it was therefore a short.

Not only did that turn out to be premature -- Gold managed to tazck on a few more bucks since then -- but it seemed to be misunderstanding the whole Bernanke versus Gold post. It was not a call to run out and buy gold there; rather, it was a critique of the corner the Fed has painted itself into. (Our initial Gold rec came  years ago when GLD was in the low 40s).

But since so many traders brought that up, here are some thoughts on Gold. Fade (short) the metal and/or the miners if you like, but you best understand the current set up before you do:

Short term, Gold is overbought. Note that since its low in early October -- when many of the same commentors here were calling for Gold to drop back down to $300, Gold has rallied from $570 to $685 -- about a 20% move in 8 months, outperforming most of the major US Indices (even before this week's unpleasantness). Sentiment is now shifting from a rather negative consensus to a fairly positive bend.

Technically, Gold has approached the July peak of $690. There will be significant resistance there. Additionally, pay attention to the major developing divergence: The Gold stock index (XAU) has been lagging the performance of gold, which is, more often than not, a major negative for both Gold and the Gold stocks.

Based on all of the above, this does not look like the beginning of a large upmove commencing any time soon. I would call that possible but not probable (unless something funky happens with Iran).

Given all of these factors, the short term probability of a breakout above $690 is only modest. The correction in Gold, which began last May when it tagged $755, may still have further to go.

However, if we do get lucky and see a decline that carries Gold to under $600 and the XAU down to near 120, consider it an opportunity. Short interest in Gold would inrease geometrically.

If this technical retracement were to unfold, I would expect a monster rally to follow.

Friday, March 02, 2007 | 05:36 AM | Permalink | Comments (15) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post



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"However, if we do get lucky and see a decline that carries Gold to under $600 and the XAU down to near 120, consider it an opportunity. Short interest in Gold would inrease geometrically."

This is an extremely indirect thought process. I think most traders hoping for gold to rise consider themselves "lucky" if gold keeps going up NOW, not if gold goes down to $600 and they have to first wait for gold to short interest to build before hoping for a short covering rally. Were I long gold, i'd rather see my trade work in a straight shot, rather than have to travel through a rube-goldberg machine. Your definition of lucky is certainly interesting.

Posted by: charts | Mar 2, 2007 7:16:20 AM

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