Trader’s Narrative

Before I delve into this, let me go back to my previous call in this sector (blog accountability and all that jazz). Last year, at the beginning of July, I wrote that the gold sector was in for a rough patch. At that time, the AMEX Gold Bugs Index was trading at around ~340. I drew a neat little head and shoulders pattern, implying that it would head down to form the right shoulder.

The HUI did carve that right-hand shoulder but it didn’t complete the measured move, instead it bounced off the neckline. All in all a pretty good call. I’d say it deserves atleast an A- — but I’m biased

Today, the picture isn’t any brigher. If you’re a gold bug, I’m afraid you’re in for some (more) disappointment.

Although gold futures have bounced a bit, they’ve bumped their heads on serious resistance in the $700-$725 level. If you look at the relative performance to the equities market, you notice that things have been very lukewarm for gold bugs. As well, there is the recent matter of a massive short position by the commercials . According to the latest commitment of trader’s report, they’re as short as they have been at previous intermediate highs: late February 2007 and May 2006. One thing you do not want to do, is to bet against the commercials in any commodity. Unless you actually want to lose money.

The gold equities (as shown by the AMEX Gold Bugs Index) have been pretty much mirroring the commodity. Unless we see a decisive breakout from this range, money in this sector is wasted. Again, notice the relative performance compared to the S&P 500 Index.

If we combine the two graphs we get the k-ratio (not shown). And it is telling us the same story. Not a good time to be in the gold market. The breadth of the sector also confirms this with 60% of gold stocks being above their 200 day moving average. The best thing we can look forward to is more meandering.

But gold bugs are nothing if not tenacious. So while the equities are partying like its 1999 — with the Dow blasting through 13,000 today — a select few will choose to be “smart” and sit on their long positions in gold or gold shares, sneering at the equity bulls. Oh well, I guess that’s what makes a market.