Gold broke up decisively from the resistance level that had pushed it back several times late last year. In the media, this is widely being attributed to the spreading unrest in the Middle East. The Wall Street Journal for example had an article titled: “Unrest Gives Gold New Shine”.
Balderdash! If gold was taking its cue from the political unrest in the Middle East, then pray tell, why did it fall from $1420 to $1310 throughout January? Shouldn’t it have gone straight up instead? The myopic tendencies of journalists is to correlate the movement of the market with news. They miss the fact that markets make news, not the other way around.
In December when gold and gold stocks were topping, I wrote a cautious note: Gold Looks Toppy But Usual Indicators Offer Little Edge. And then in late January before it embarked on this recent bounce, I wrote: Renting Gold For An Opportunistic Trade Higher. And here we are 10% higher. Last week I wrote that gold was on course for new heights. And here we are.
What is remarkable at the moment is the apathy apparent from the public regarding this raging bull market. You would imagine that if a sector had been in a prolonged and continuous bull market for several years and was setting new record after new record, that we’d see a tremendous amount of excitement and attention directed on it. But that simply is not the case with gold.
Rydex Traders Skeptical
Rydex traders – who are normally too happy to jump on momentum – are actually shying away from gold even as it makes new highs. The Rydex Precious Metals Fund assets stand at $221 million. That’s where they stood 2 weeks ago when gold was significantly lower. Here is a zoomed in chart to show you the divergence:
As well, back then gold had yet to break above its previous resistance levels. This is a significant difference. So in effect, Rydex traders are acting nervous and skeptical of this new high. Which from a contrarian view looks promising.
Another measure of the public’s mood, the premium or discount to net assets for the gold closed-end fund is showing a similar amount of apathy. Right now Central GoldTrust CEF (GTU) is trading at appx. 3% premium. At the recent low we saw a discount of -3%. But the premium level is not enough to warrant caution yet. In the past we’ve seen premium get pushed up to 10% or more before gold has encountered resistance. So again, we have little reason to believe that gold is in thin air territory, even as it climbs the summit.
According to Mark Hulbert, keeper of the Hulbert Gold Newsletter Sentiment index (HGNSI), this measure is relatively muted at 45.3%. This means that those newsletter editors who focus on gold and gold stocks are recommending to their clients to be long the gold market with less than half of their portfolio and the rest to cash. That is a defensive posture.
To put it in perspective, keep in mind that in early December 2009, when gold was trading at a new record high of $1200, the HGNSI hit 68%. But now, when it is at another record, sentiment is not all that exuberant. You may also recall that back in early February, that small correction in gold was enough to send gold newsletters scurrying for cover with the HGNSI falling to -1.4%. That’s right. They were actually recommending to short the gold market with a tiny portion of their clients’ portfolios.
INO’s Gold Target
The above should provide enough ammunition for the argument that gold is headed higher. But how much higher and at what time frame? To answer that, here is a smart and short video from Adam Hewison explaining how he arrives at a longer term target for gold. Stick around after the video to find out how to get future videos and keep up to date on this and other markets.