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Gold Losing Relative Strength & Fair Weather Friends at Trader’s Narrative

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:

gold relative to SP500 Jan 2010

And here is a chart of the Gold Bugs Index (HUI) compared to the S&P 500 index:

HUI relative to S&P500 index Jan 2010

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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11 Responses to “Gold Losing Relative Strength & Fair Weather Friends”  

  1. 1 GreenAB

    could you please provide a chart with rydex traders compared to gold?

    how did they behave over other corrections of the recent past?

    other than in the stock market i doubt their actions mean anything.

    true: they reflect the hot money chasing any momentum.

    but the bubble in gold (which i believe) has a different character.
    these gold bugs - once convinced that the central banks are printing us into hell - tend to be very stubborn.

    right now i donĀ“t read much of “sell gold” , but most guys see a buying opportunity with the insane argument that “china and india provide safe downside support since they purchased large amounts of gold at 1.000″

  2. 2 Blue

    Hi Babak,

    I always enjoy your column. Would you mind telling us where you get the Rydex information. Do they make it public? Do they sell it?


  3. 3 Stan

    You state: have you noticed just how weak the precious metal sector has been these past few months?

    Apparently you chose to ignore or not include the 16 month uncorrected uptrends and recent highs in Platinum and Paladium. Your comments apply more correctly to gold rather than “precious metals”. A look at PL and PA gives a much different perspective since their 2007 highs. Interestingly since their major down moves in early 2008, they have both enjoyed rather impressive 16 month uptrends that may or may not be still be intact after new highs just this month. PL and PA also have much different long term charts as well. Bottom line is that you really should not generalize when talking precious metals. Your points are valid with respect to gold but not necessarily elsewhere.

    That said, your blog is among the best out there. Keep it up!

  4. 4 Babak

    Blue/GreenAB, the Rydex information is available at their site - that is, they share it with the public for free.

    Stan, you’re absolutely right. I stand corrected. When I say precious metal I think of gold primarily but that is a misnomer. I looked at platinum and the RS looks very weak (especially from March 2009 onwards). Palladium looks stronger in the short term but in the long term, it isn’t all that impressive.

    Also, thanks for the kind words!

  5. 5 Fernando

    Good stuff mate!

    We can probably see gold pick up again for another ride, but as you state, is starting to loose it’s strength!

    Some other factors i can see attributing to this easing of upside is that gold has been put higher due to speculation, and fear of inflation. It’s true value might be $100 lower!

    And also, once this big pour of cash from the central banks, start easing, we might see some more pressure coming to gold….

  6. 6 tooearly

    Rydex folks all puked on 1/20/10
    assets dropped in half!
    Maybe they are not so dumb after all!

  7. 7 Blue

    Hi Babak,

    Would you mind providing the URL for the Rydex page where they show the sector allocations of their customers. I can’t find it. Do they provide historical data or just current allocations?


  8. 8 Babak

    Blue, here you go.

  9. 9 Blue

    Thanks, but the page doesn’t show any asset values. The asset column is all N/A.

    When the assets are displayed do you copy them so that you can refer to them later? Or is there a way to get historical data?

  10. 10 Babak

    Blue, see the tab at the top that says “historical NAV”?

  11. 11 Blue

    Sorry. Didn’t look hard enough. Now I see it. Thanks!

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