Trader’s Narrative

Gold is up 37.5% for the year (so far) and up 70% from its November 2008 low. That’s especially impressive compared to the S&P 500 which is only up 23% for the year. So how long can this out performance last?

One of the most adamant and unapologetic gold bulls for the past few years has been and continues to be David Rosenberg of Gluskin Sheff. Recently Rosenberg opined that gold could even rise to +$2000 levels:

If China were to lift their gold reserves to 5,000 tonnes, which is equivalent to about two years of global production, that shift in demand would boost the gold price by $800/oz to around $2,000 ($1,978) based on our models. If China moves towards 10,000 tonnes, well, that would end up taking the gold price to $2,623/ounce if our calculations are in the ball-park.

The operative word here being, if. Dashing the hopes of gold bugs, Hu Xiaolian, the vice-governor at the People’s Bank of China, called gold a bubble and threw cold water on the idea that the Chinese central bank would increase their gold reserves.

But even an unabashed gold bull like Rosenberg concedes that a correction is imminent. For one, fund flows into gold have ballooned: gold holdings in ETFs is now 1766 tons, that’s an increase of 48% from last year. Even if we ignore that, there is an unmistakable whiff of giddy optimism from several gold sentiment measures.

If we reduce this to a high school analogy, it is difficult to be a rebel and stand out when everyone else is rebelling. And if we ignore those high falutin’ gold sentiment indicators, the chart is screaming MANIA! as gold rises into a parabolic blow off (again).

And if we ignore that, then there is the data from the Commitment of Traders reports which are showing a record high in net long positions for speculators:

That is the footprint left by giants like John Paulson, Paul Tudor Jones II and other hedge funds who have piled into this trade.

The thing is, an immediate 25% correction would only serve to take us back to long term support. During gold’s 8 year bull market, it has almost always managed to ricochet off its 200 day moving average. The only exception was in 2008 when price pierced that support by 25%.

But just like an airplane losing its engines in mid-flight, gold won’t plummet straight down. So we’re looking at a possible correction between 20-40%. When that will come about, I don’t pretend to know.

And most importantly, such a correction would not negate the long term bull status of gold but merely be another short term correction, just like the many we’ve seen before.