Trader’s Narrative

The world’s largest gold mining company in the world, Barrick, just announced that they have eliminated all short positions (hedges) and will not use them in the future. If you think this is actually bullish for the price of gold, think again.

Just as the top in tech was marked by the last bear throwing in the towel and going long, I think gold’s top can be marked by the largest commercial hedger finally acknowledging what many have known for years, that there’s a gold bull market!

For years the shareholders of Barrick have been assailing Peter Munk and the Barrick board to erase one of the largest commercial short position in gold. Ironically, while gold has been galloping ahead, Barrick posted its first quarterly loss ($557 million).

Old Resistance
The other reason why I’m not hopeful for gold is that in the early 1980’s it hit $725 in double top formation. We spiked to that area again last year summer. Unless we can decisively break through this long term resistance, gold doesn’t have a chance.

Wouldn’t it be hilarious if the fanatic hedgers at Barrick not only miss all the upside of the bull market but throw in the towel at precisely the top?

Not So Fast
The only positive that I can see right now is that the Philadelphia Gold & Silver Index (XAU)/gold price ratio reached 0.2 today. According to Mineweb, in the past 24 years this has happened 32 times. And all but one of those times has lead to a positive return for holding the XAU for one year from the signal day. The average return being a whopping 40%.

Even with the statistics, I’m a bit skeptical of the validity of using the Philli index (XAU) since it is not a pure gold index. No real gold bug uses this index but rather the Gold Bugs Index (HUI) or the CBOE Gold Index (GOX). And if we go by those indexes, the k-ratio level right now doesn’t look so promising.

So there you have it. Some technical and sentiment cross currents in the gold stocks sector. Other than the futures contracts (indices and commodity), and the gold stocks themselves, there is a relatively new ETF you can use to play this sector: Market Vectors Gold Miners ETF.