Thomas
DeChastelain
Memorial Archives

Gold Sector Update
posted Dec 2, 2005 at 10:27PM

Bullion Daily



Bullion Weekly



Bullion is an overbought technical condition on the daily and weekly time scales. Jon Kaplan of www.truecontrarian quotes market vane data at 88%, which is at historical highs.

HUI Weekly



The two circled areas seem to be depicting a similar technical situation i.e. we have the index consolidating below a triple top resistance. A triple top breakout is considered to be a very powerful buy signal.

When you look underneath, however, one sees that the environment is much different today.

In July 03 the HUI was moving up into resistance even as bullion was retracing back into its 200dma. Today bullion is at a hefty premium to its 200 dma. Indeed relative gold stands at 1.13, which, if I remember my Adam Hamilton essays, is a very high level.

As well in Jul 03 bullion COT was at optimum buy levels with commercials net shorts comprising under 20% of total open interest. Today they comprise 45% of total open interest which over the course of gold's bull market has signified trading tops.

Now if this is a Wave III...or if we have gone into a phaze II of the gold bull, could not these paramaters be old news? Perhaps - the scenario here being that a US dollar rolling over would initiate an acceleration phase for bullion, and hopefully, finally get unhedged gold stocks to start moving.

I do not believe the USD is quite ready to totally give up the ghost quite yet. I say that because of the COT data (see below). The net commericals were at extreme bearish levels, but the latest report showed that a good chunk of them got covered with very little damage being done to the USD chart pattern.

USD COT Data

Basically I am still waiting for a similar development in bullion's COT structure. Over the past few years bullion COT has frequently gone from an optimum sell range to an optimum buy with only minor retracements in actual price.

Now with hedge fund money having more and more of an influence on markets it is possible for bullion to continue on a parabolic trajectory. I do not plan to chase anything (famous last words), but suggest that if you do, that you include proper risk mitiagtion within your trading plan.

Good trading,

Bullet Bullet Bullet