Traders and the Gold “Top”

Last week’s commentary, Gold Knows, engendered lots of comments by traders. Quite a few suggested that the post itself was marking the top in Gold, and it was therefore a short.

Not only did that turn out to be premature — Gold managed to tazck on a few more bucks since then — but it seemed to be
misunderstanding the whole Bernanke versus Gold post. It was not a call to run out and buy gold there; rather, it was a
critique of the corner the Fed has painted itself into. (Our initial Gold rec came  years ago when GLD was in the low 40s).

But since so many traders brought that up, here are some thoughts on Gold. Fade
(short) the metal and/or the miners if you like, but you best understand
the current set up before you do:

Short term, Gold is overbought. Note that since its low in early
October — when many of the same commentors here were calling for Gold
to drop back down to $300, Gold has rallied from $570 to $685 — about
a 20% move in 8 months, outperforming most of the major US Indices (even before this week’s unpleasantness). Sentiment is now shifting from a rather
negative consensus to a fairly positive bend.

Technically, Gold has approached the July peak of $690. There
will be significant resistance there. Additionally, pay attention to the major developing divergence: The Gold stock index (XAU) has been lagging
the performance of gold, which is, more often than not, a major negative for
both Gold and the Gold stocks.

Based on all of the above, this does not look like the beginning of
a large upmove commencing any time soon. I would call that possible
but not probable (unless something funky happens with Iran).

Given all of these factors, the short term probability of a breakout
above $690 is only modest. The correction in Gold, which began last May
when it tagged $755, may still have further to go.

However, if we do get lucky and see a decline that carries Gold to
under $600 and the XAU down to near 120, consider it an opportunity.
Short interest in Gold would inrease geometrically.

If this technical retracement were to unfold, I would expect a monster rally to follow.

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