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Late last year I pointed out that gold has a tendency to go into spectacular parabolic blow-offs, having done so several times since 2005. The recent strength in gold, aided or perhaps solely based on, the sovereign debt crisis from the Eurozone has pushed gold into a parabolic rise again. This is especially true when we price gold in Euros:
I was caught flat-footed since I was expecting gold to meander lower from March. It has done anything but of course. Since my skeptical comments gold has risen by 12.4% and the AMEX Gold Bugs index (HUI) by 18%.
But even so, at this point I can’t help but feel that I’m too late to the game. We have a parabolic rise in gold - it closed at $1,243.10 above last year’s high - bringing it very close to the magical round number of 1000 Euros an ounce. Maybe I’m doomed to have better luck spotting tops in gold than tradeable lows. But as well, Lemetropolecafe mentioned recently that India, usually an important and constant buyer of gold has stopped importing gold due to the high price.
I looked at the trading pattern of Rydex market timing traders to try and get a grasp of the sentiment among retail traders for gold. Surprisingly, Rydex traders are cool to the charms of a new high in gold. As you can see, while the NAV of the Rydex gold fund has recovered, it isn’t yet at a new high. But the 13.5% recovery from the mid-March levels has not been enough to entice a corresponding rush of assets back into the Rydex gold fund:
From mid-March assets have only grown by 19% - not far from a 1:1 ratio for NAV growth. It isn’t uncommon to see a very disproportionate rise in assets as market timing investors rush in, hoping to ride a trend.
Relative to other sectors, the precious metals fund has staged an even more impressive comeback. But it isn’t yet at a level which would be alarming. As well, we have to take into account the fact that Rydex traders are fleeing other funds, therefore pushing up the relative portion of the precious metals fund. So sentiment looks to be lukewarm still.
ETF Fund Flows
A lot of people are scared enough to push their money into gold, believing it to be a safe haven in this recent time of economic stress. According to TrimTabs, the SPDR Gold Shares (GLD) has seen a $2.3 billion net inflow between May 2nd and May 10th (inclusive). This is the highest spike of inflows in the past 12 months.
I’m not sure whether to interpret this as contrarian for gold or as contrarian for the equity market. If we indeed have investors so scared that they are buying gold at such a frenetic rate then this could be a good sign that the market did scare enough weak hands and that we did see capitulation.
Gold may have a bit more juice left in this recent spike. But if you’ve missed the run-up, like me, then I’m not sure the smartest thing is to push the trade here and now. The relative distance of gold from its 50 day moving average is at 7.4% and fast approaching levels that correspond to tops (~10%) so I’d be very careful about squeezing any more before we see it unwind.
But since I have been a hot hand in picking tops but not lows in this market, I will humbly suggest that you consider listening to Adam Hewison of INO who has been playing gold like a virtuoso recently. He is currently long at 1192. Watch the short video to see his most recent swing trades and what levels he’s watching to exit their current position.
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