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Gold (clarified)


The post I wrote yesterday about gold sparked more emails than any other I've done since joining Minyanville, by a wide margin. Gold sparks emotions in traders like few other topics, and the opinions are usually at one extreme or the other - either it is going significantly higher or significantly lower - and rarely is there a middle ground.

I want to make my thoughts perfectly clear. From a sentiment standpoint, based to a large extent on Commitments of Traders data (i.e. the commercial hedgers and small speculators I talked about yesterday), the risk/reward for gold "the metal" seems moderately unfavorable for initiating long positions, with it likely to become extremely unfavorable should we see a continuation of the recent rally. This does not necessarily translate to gold mining stocks or any other derivative. For example, the correlation between spot gold and Newmont Mining since 1998 is 0.79 (on a scale of -1 to +1), which is quite strong but not perfect.

It also does not mean that I expect gold to trade down to $200/oz. in the next three weeks. It simply means that I would not be looking to initiate a long position in gold (the metal itself) when the sentiment situation is as it is. I would rather be betting with commercial hedgers and against small traders, which I would not be doing, based on a variety of measures, if I went out and bought gold futures today.

I trade mostly off of sentiment, but it is only one part of a complete trading thesis, as Todd has outlined nearly every day. Fundamentals and technicals do matter, and could easily override an unfavorable sentiment condition. The risk of opening a long position right now is not appealing to me, but for someone who has a different time frame or more knowledge of global supply/demand characteristics or opinions on a global flight to safety, it may be a perfect time. Knowing your frame of reference and your "uncle point" are musts before making a decision.
No positions in stocks mentioned.

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