The last time we looked at the precious metal sector, was in December as gold was in full correction mode after a parabolic crescendo. My analysis then was that gold was clearly correcting after a massive run-up but that due to a number of reasons outlined, this profit taking would be shallower than normal.
While the 50% Fibonacci retracement level would have been a natural pit stop at $1045, I think that we are about to see gold find firm footing again. But before I get to that, have you noticed just how weak the precious metal sector has been these past few months?
Because of the new year and the start of a new decade, there was a lot of talk about how gold as an asset class has been a winner in the long term. But since March 2009, when almost all other markets bounced back from the ledge of the abyss, gold and gold stocks have been very weak, relatively speaking.
Here’s a chart of the price of gold compared to the S&P 500 index:
And here is a chart of the Gold Bugs Index (HUI) compared to the S&P 500 index:
That’s the intermediate term picture, getting back to the short term correction, I think we are about to see a rebound here because of a major shift in sentiment. Rydex traders who love to time sectors, rushing from Rydex fund to fund have suddenly dropped the precious metals sector like a bad habit. The drop takes gold from one the highest sectors (in terms of assets) to the lowest one within a remarkably short time.
As you can imagine, the recent parabolic top in gold coincided with one of the highest Rydex asset portions ever. During that manic top almost 30% of all Rydex sector assets were in gold. But now, we are back to the other extreme. This shows that there is no complacency. If Rydex traders had instead persisted in holding gold or even increasing their holdings, then this would have spelled a high probability that the correction had not run its course. But they are instead abandoning this once white hot sector as soon as it stopped performing.
As a crowd Rydex market timers are a great contrarian tell. So when they abandon a sector with the swiftness of a tween dropping a clothing trend, it is a great fade. That’s why I wouldn’t be surprised to see gold and gold stocks end their correction shortly.
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