Trader’s Narrative

Last week I wondered if the strength in gold was due to the implicit strength of the precious metal itself or whether it was merely a by product of the weakness in the US dollar: US Dollar’s Weakness or Gold’s Strength?.

It is obvious now that the US dollar is being thrown to the carry trade wolves in order to save the economy. This is the same play that central banks made several years ago with the exception that back then it was the Yen that was sacrificed.

In any case, gold continues to walk higher on the chart - it reached $1,064.20 today at COMEX. The distinction may be a moot one because as long as it continues, those on the right side of the trade will profit. But since there was some questions regarding the way I tried to strip out the US Dollar effect on gold price, here’s another chart which uses a slightly different method:

Source: Elliott Wave Intl

The song remains the same. Gold hasn’t reached a new high when we strip away the effect of the dollar. The second chart above looks at gold relative to a basket of other currencies (Yen, Euro, Swiss Franc, Australian Dollar, Canadian Dollar and the Pound).

Also, as noted previously, large speculators have crowded into the long gold trade. The most recent COT shows them to have 50% of open interest. But in general sentiment towards gold is relatively muted - especially considering the many times it was unable to climb above $1000.

From a purely technical point of view, this is a gold bull market. But I’m trying to deal with some nagging questions. For example, if there is inflation on the horizon, why hasn’t it registered on the CRB? After all the commodity index is rading below its 30 year average and it is flat since June 2009.

Honestly, I can’t see any signs of inflation anywhere. In fact, you don’t have to look hard to see deflation almost everywhere. So the gold story is one written on the back of the US dollar. And with the US dollar sentiment so incredibly negative, it makes me cautious on gold - bull market conditions notwithstanding.

Gold is once again at the magical $1000 threshold. It was just a few months ago that I talked about the precious metal and mentioned that I spied the sign of a gold top. That was in early June when gold was trading at $980. That was a great call because into early July gold fell to $905.

Here are various perspectives on gold’s current technical outlook and at the end, my own take:

MarketClub
On August 6th, in a video titled “Has the bull move in Gold finally arrived?” Adam from MarketClub explains why he was (correctly) bullish. At that time, gold was trading at around $965. It dipped slightly in the following weeks and then pierced the psychologically important $1000 line in the sand.

In a more recent video, Adam asks, “Is this the move we have been waiting for?“. To find out what he thinks now, click the link or graphic to watch the video:

He shows a long term chart of gold and talks about “energy fields” on the chart. This is Adam’s name for what most others call periods of contraction in price range, which often precede periods of expansion in price range.

Adam’s got a ‘hot hand’ right now in gold as he’s been correctly calling the direction for some time. To learn more about his approach, here’s a short introduction to MarketClub Alerts. Besides all the great material they offer, what I like about MarketClub is that they stand behind their product with a 100% no questions asked money back guarantee. That’s the touchstone of a reputable and solid outfit.

DecisionPoint
Carl Swenlin’s recent commentary on gold is also bullish:
Continue reading ‘Various Perspectives On Gold At $1000′

As promised in last week’s sentiment overview, here is the information and chart on the position of the retail futures traders (known as small speculators).

The most recent Commitments of Traders report covers the position of futures market participants as of last Tuesday (February 5th, 2008) and it shows that on aggregate, the small speculators are very pessimistic about the stock market.

According to data from SentimenTrader.com, the small speculators are holding just slightly above $8 billion worth of futures contracts (S&P 500, Dow Jones & Nasdaq 100):

As you can see on the chart above, this is lower than any time in the past few years. The only caveat I would throw into this wildly bullish scenario is that each time the retail futures traders throw in the proverbial towel, they do so at a slightly lower level.

The only exception to this was the low in late 2006 which was around $14 billion - above the 2003 low. And the low in 2007 which doesn’t correspond to a rally.

But after all is said and done, when we put this together with the horrible sentiment we’ve seen in the past few weeks, we get a picture of a market that is positioning for a bottom.

I was busy on Friday and couldn’t post this at the usual time. Here is the weekly sentiment roundup:

Sentiment Surveys
Fear gripped the respondents to the AAII survey last week as bullishness plunged to 26% (from a recent high of 47.62%) and the bears, meanwhile, catapulted to 55%. Whenever we’ve seen this much bearishness, it has been a good time to buy. Click here to see a chart of what the S&P 500 does historically after similar AAII readings.

Surprisingly, the Investor’s Intelligence survey (which is one person’s judgment on the sentiment of newsletter writers) shows the opposite: 52.2% bullish and only 24.5% bearish. Personally, I’d rather go with the gauge that relies on the response of thousands (instead of one). Especially as the other sentiment indicators dove tail it so well.

(Mutual) Fund Flows
Data from TrimTabs corroborates the shocking hemorrhage in the mutual fund industry I wrote about before. According to them, 2007 saw probably the largest outflow in history.

I still have no idea what is going on here. And it is a bit strange that no one is really talking about this in the media. It does fit in with the retail investor’s sentiment and from a contrarian point of view, it is very bullish. Take a look at this graph sent in by a reader. It puts this into historical context:

Click to Enlarge

Option Traders
Last week, before the market sold off, I wrote a cautionary post: Retail Option Traders Tad Too Giddy. And right on cue we saw the result of that “giddiness”.

Option traders have backed off, a bit. The CBOE put/call ratio is now almost 0.7. And the retail traders, as measured by the ISE Index, dropped from 168 to 93. These are not “buy zone” levels but as the market digests the loss over the weekend, I think we will see an expansion of the panic that seems to have started - which will provide those levels.

Insider Buying
The legal kind, is off the charts. According to various sources that track what corporate insiders are doing, they are scooping up shares hand over fist. They’ve been on a buying spree pretty much since last summer and have never become net sellers (yet).

Commitment of Traders
The commercial players in the futures market (the most well funded and knowledgeable of the bunch) have significantly stepped back from the record COT net long position they had last summer. The best I can say is that things aren’t as wildly bullish as then. But they are somewhere near the middle - no where near net short.

Forget gold and gold stocks. It is time for silver to shine in the precious metals’ sector.

At least that’s what the Commitment of Trader’s report is telling us.

Lately the commercials have been been net short the least number of contracts in five years. Since they are almost alwas net short as part of their usual business, what matters is whether they are really, really short or just a little bit.

Right now the most knowledgeable players in the silver market want to limit their exposure to a potential rise in the price of silver.

The last time they had this nominal contracts net short was in the summer of 2003 when silver was less than half of what it is now. Even more meaningful, the small speculator isn’t excited at all. Eventhough the price of silver has shot through the roof, they are holding their smallest net long position in years.

In contrast, we are seeing the exact opposite in gold’s Commitment of Trader’s report.