SHOULD GOLD BULLS WORRY ? / SEEKING ALPHA ( RECOMMENDED READING )

Should Gold Bulls Worry?

by: Hard Assets Investor

December 10, 2009

Real-time Monetary Inflation (last 12 months): 4.3%

Thursday morning's jobs data gave a lift to the gold market after five straight days of losses. Of course, there's a full day of trading ahead, so it's too early to tell if the gains will hold. That kind of uncertainty makes gold investors edgy.

Ironic, in a way, that a commodity that depends so much on uncertainty can itself be undone by doubt. Much of gold's buoyancy stems from its utility as a hedge. Classically, we've been taught that the metal hedges inflation. Well, okay, in a broad sense, it does. But only in a very broad sense. We've all seen, by now, what CPI adjustment would do to the price of gold (if not, then see "A Picture's Worth A Thousand Words (Or Dollars)") http://www.hardassetsinvestor.com/component/content/article/627.html

Gold's really better hedging uncertainty. When faith in the status quo—denominated in greenbacks, pound sterling or Icelandic krona—evaporates, capital flows to gold. Keeping a gold hoard is the financial equivalent of keeping your corn crib—and your powder—dry.

The recent sell-off in gold spooked some gold investors, though. A lot of money flowed to the dollar after last week's better-than-expected employment figures were released. The Johnny-come-lately and leveraged goldies were quickest to bail. No doubt, too, the gold market was ripe for a correction. It was just too one-sided. It, in fact, still is. At last look, 97% of gold positions held by money runners were long, down from 99%.

Should gold investors, then, worry that the metal's long-term trajectory has reversed? In a word, "no." Not yet.

The fundamentals that underpinned gold's rally haven't changed, so spot gold's secular bull is still very far away from the slaughterhouse floor.

Technically, the uptrend that began in 2001 really won't be threatened until metal prices breach the $741 level. That's cold comfort if you bought gold at $1,100 or its ETF equivalent, though.
Suffice it to say that, right now, worry might be justified if you're a gold trader with shorter time and money management horizons. The February COMEX contract is currently working the lower half of its volatility band. Today, the bottom of the band's at $1,097.

There's some good news for the chart-minded: The mid-November price gap between $1,117 and $1,130 has finally been filled. Today, traders will be watching closely to see if that area develops as a base of price support.

COMEX/NYMEX Gold (Feb. '10)

As far as the intermediate trend—that is, the July-December rally—is concerned, a correction as deep as $1,030 could be survived today and still, the trend would remain intact. Brakes should squeal, however, at the intervening levels of $1,106 and $1,068.

There. That ought to make you feel better.