Right On Schedule: Gold Reaches Record High $1440

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.

Gold Premium
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.

Newsletter Editors
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.

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4 Responses to Right On Schedule: Gold Reaches Record High $1440

  1. Dr Bohica says:

    Babak, can you please say how you get the running data to keep track of TOTAL ASSETS versus simple PRICE for the Rydex funds?

  2. Silverdaddy says:

    Gold down big today. Looks like a potential double top in gold. Silver has recently been and still is the better play.

    • Babak says:

      Yes, gold got smacked down again. The HGNSI spiked to 72% yesterday – that’s a 75% move from early February and not that far from its all time high of 89.6% (set way back in February 2002).

  3. Jim says:

    Babak, a couple of small-speculator measures are giving conflicting readings on gold.

    First, the last-released COT (data over a week old now) showed that small specs were very net long on gold, around the same levels as previous short-term tops over the past year:

    Second, we now have GDX, GDXJ, and GLDX to measure investor demand over the range of gold-stock risk (GDX being the least speculative and GLDX being the most speculative). Looking at the three charts, I don’t detect any fervor to rush in on the most leveraged/speculative stocks in the sector (almost the opposite, really). My own experience is that major gold rallies end with a bunch of money flowing into the most speculative sections of the gold-stock universe.

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