Wednesday, July 8, 2009

Gold and the market

Been out of action blogwise on this project that is creeping closer to completion...but a couple of quick thoughts:

Gold to break lower
The market is long gold. It makes me nervous when the market lines up on the same side of a trade and my sense is that this is where we are at. Market Folly keeps track of a range of hedge funds and it appears from their research that a smorgasbord of Tiger Cubs and a longer list of luminaries are all on the gold trade. It's the inflation hedge - that doubles as a deflation hedge. That's fine - but it makes for a squeezy exit when they want to get out.

Hugh Hendry captures this neatly when he notes that the Pink Pages of the Financial Times are congratulating the gold bugs for their wisdom.

The gold price is coiling for a break-out - that much seems clear. But the inverse head and shoulders pattern that has
technicians pointing at $1300-$1500 looks to me like a trap. It could just as easily drop to $700 (per Robert Prechter of Elliot Wave fame).

For me the lead is coming from gold stock prices. They have been painting out a series of lower highs recently. Time to cut the NCM long...

Equities will not re-test their lows...yet

There seems perhaps a little to much consensus for a fall in the market come September or as late as Q1 2010. Be that as it may, and while I'm still small short XJO, I'm expecting the market to find support well ahead of its March lows in the current sell-off. The US administration has already started greasing the wheels for a second stimulus package. They are unlikely to go down without a fight. Chances are that this current sell-off will be cut short by government intervention.

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