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Minyan Mailbag: Bear Trap for the XAU?


Did you say trap???


Editor's Note: Minyanville is a community of people who share an interest in fiscal literacy. As perspective is an important aspect of our daily routine, we share this exchange with hopes that it adds balance to your process.


About three weeks ago, you mentioned that the XAU needed to advance to 104 to "breakout." Last week you said the 102 level was important.

Yesterday we advanced past BOTH of those levels. What is your target?

Scott Reamer yesterday posited that we are "95% done with the move in gold" for this move. While the XAU is not the same as owning gold, at what level on the XAU would you feel this latest move is a "bear trap."

-Minyan John

Minyan John,

Thanks for writing. The two levels, 104 a couple of weeks ago, then 102, are a function of the downtrend moving down. Let's take a look at the August 15 chart to illustrate this.

Charts courtesy Dorsey, Wright & Associates.

XAU Aug. 15, 2005

Meanwhile, this is where we are today:

PHLX Gold/ Silver Sector (XAU)

The move through 102 effectively changed the context to positive by taking the XAU through the downtrend line from the November highs. The move above 104 was also the second consecutive buy signal for the XAU. Clearly, this move has been tradable. But longer-term, the XAU has been making lower tops since December 2003/January 2004. This move so far is taking the indicator to the top of its descending 18-month range, and is occurring, as Scott Reamer noted, with a number of DeMark exhaustion signals occurring for the base metal. A daily 9 was registered for the XAU on Tuesday. The price objective based on a point & figure vertical count, basis 2x3 scale, yields a target of 126.

Like everything else, this is about risk versus reward. This is not advice, but in my view, the risk of adding to gold positions here is greater than the potential reward. But I say that from the standpoint of having core positions in gold and silver that are more than three years old. If I had no positions I might feel much differently right now.

Like Scott, I believe gold will go much lower than where it is now as it succumbs to the effects of asset price deflation. But there is another risk that few talk about. That is the risk that whether my thesis plays out or not, and whether gold begins a bull market from $500 or $250, the size of the asset class itself remains so small that those who are not in will have trouble getting in once the long-term outlook for metals is recognized. Moreover, in bear markets stocks tend to act like stocks no matter the nature of the company issuing the shares. In a true deflationary environment, shares of gold and silver companies may dramatically underperform the metal itself. That is another risk.

Hope this helps answer your question and clarifies for you my comments with respect to gold.

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Position in gold and silver.

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