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Rising Sun Gold US$500 Coming to a Theater Near You
Ed Bugos
The Gold Sector Outlook Summary of current bullish drivers:
Regarding the CFTC's Commitment of Traders Report (COT's): as of August 16th total COMEX gold open interest increased sharply by 43,794 contracts to 331,633 contracts (still 9% below the November 2004 peak at 362,336 contracts); the commercial NET short position was cranked up to 58% of total open interest, which is just past the June high (55%) as funds piled in during August (the record net short position was 64% - April 2004); the speculative NET long position was ratcheted up to 48% of total open interest, which is a new record (it peaked at 43% in June, and the prior record speculative net long position was 47% - also April 2004). Obviously these data moved to a contrary extreme quickly. But some facts might help put it into context. First, the commercials are always net short, their net short position ranged from 15 to 64 percent since 2001; the speculative net longs have ranged from 10 to 47 percent; the figures are indeed at the high end of these ranges. Second, this statistic is volatile. For instance, the commercial net short position fell from 56% in April to the low end of its range, 22%, in just four weeks; while the speculative net long position fell from 46% to 14% on just a US$20 retracement in gold prices this past May. Third, the statistic has been a poor timing indicator. The commercial net short position has been known to stay over 40% for months at a time; in the period between July 2003 and April 2004 it ranged between 40 and 60 percent for the entire 10 month span - during which time, gold prices advanced about US$75. If you went short in August 2003 when the commercial net short position ramped up from 29 to 55 percent in just one month (similar to what just happened) you'd have been shorting the breakout move that took gold from about US$365 to US$433 over the course of the next few months with hardly a hiccup. The speculative net long position made up more than 30% of total COMEX open interest up until about December 2003, persisting throughout the bulk of the move. It is too early in the current leg - which looks more like a potential break out move than anything so far - to get bearish due to the sudden change in COT's.  Note that the gold chart today looks very similar to what was unfolding during August 2003. These levels could easily persist until January or they could be flushed out in a US$10-15 point backfill, sort of like the one that just occurred. Moreover, a sudden change like this is often bullish; and in this statistic so is the subtle uptick in odd-lot holdings that occurred in the past few weeks after being lifeless for nearly two years. Perhaps the bearish press on this data continues to be a bullish sign in that not everyone is as confident as I am, yet.  The gold charts have looked good in all the currencies now since June's break out propelled it to record Euro levels, a new 13-year high in Yen, a new 9-year high against the Pound, a 12-year high against the Swiss Franc, and even a new 18 month high in the South African Rand. The DOLLARS (Aussie, CAD & USd) have been the strongest checks against gold since May (and since 2003 for the first two, plus the Rand). But just last week in fact gold went off to new eight month highs against both the US dollar and the Australian dollar, leaving among the liquid currencies only the Canadian dollar to provide a check on the nearly boiling-point gold ticker. New record highs in oil and copper helped the case last week, and could even be called a catalyst, though one whose interpretation I've warned about. In US dollar terms, if the bullish break in the tape last week was a starter's pistol, and not just someone popping a balloon, if you will, we should be able to hold the US$433 level on this backfill before the big one through $500. The strength in the SA Rand price of gold hasn't gone unnoticed. In any case, the trends look good; the behavior looks good; the mood holds just the right degree of skepticism. I see nice two-year rounding bottoms in the Aussie and Rand price of gold, and a three year neutral triangle in the Canadian dollar price of gold consolidating just underneath its 1996 high, and before that, its 1988 high - you can only see the tail end of the triangle in the above chart but there's also some rounding behavior here. The USd price of gold broke past its 1996 high last November, and is now threatening to make new 18 year highs that I've said will confirm the November break out, and also the bull market signal in case it was missed. The US$395 to $415 level should already communicate formidable bull market support as it has been tested successfully several times (except briefly in April 2004) since first breaking through US$400 at the end of 2003. I can't see anywhere for this market to go, beyond the next few days, except to our targets, and that at least. A bounce in the USd and a pull back in oil prices could be underway which is important for some people; but as far as I am concerned, at this stage, it hardly prompts a profit taking opportunity. Morons like Jim Cramer are calling the 1% headline gain in the July PPI a final blow off spike, and are motivating a minor dollar rally on the basis of a further increase in foreign purchases of US debt securities last week on USd weakness (which has been par for the course since the dollar's bear market began); and the API meanwhile reported that the run in oil is finally having an impact on US demand, which probably is an early sign of a top… though markets can easily overshoot such fundamental indications… in fact they usually do. Notwithstanding, my oil outlook remains marginally bullish in the short to intermediate term ("very" bullish over the long term) despite my uncertainty. I don't have a strong opinion on oil right now - I wouldn't be surprised to see it move US$10-15 either way at this point. It could run to US$80 yet, or higher, in the short term; or this could be the beginning of a correction to the US$40-50 range. Either way, this market has come a long way from the days when it traded at US$12 in 1999 and the only ones trading oil contracts on the NYMEX were me and two Arab analysts out of New York. In conclusion, whether oil falls or the dollar rallies here, the gold market is more than set for a major upside break… it is more than simmering or percolating… the tape says it is near a boiling point. It's time again to take this bull by the horns! To reiterate, a gold move to US$500 could take the HUI up to the 300 handle; but a significant move past US$500, which I would not rule out at this stage, could set the stage for a monster move to the 400 range. My outlook is for gold prices to explode upward, taking the focus back to the Fed and its inflation policy, causing bond yields to rise, in turn causing a contraction in stock market valuations (PE ratios), not necessarily in that order - any one of the markets could front run (anticipate) the other developments before gold, but likely not. Ed Bugos August 20, 2005 The Goldenbar Report: is not a registered advisory service and does not give investment advice. Our comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While we believe our statements to be true, they always depend on the reliability of our own credible sources. Of course, we recommend that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you to confirm the facts on your own before making important investment commitments. |