Gold Chart

Comments: I just returned from an unexpected business trip to Nigeria, hence the lack of updates recently. The above chart shows that Gold has been creating a channel with some obvious buy and sell points. The HUI seems overbought in the short term, but it is now consolidating for a couple of days. My exposure remains 31% and I think I sold a bit too early. Hopefully I'll be able to get back on board with at somewhat lower prices, though it's unclear where we are going next in Gold. The COT report remains bearish in my opinion.

On a side note, an interesting article about a company (Nautilus Minerals Inc.) listed on the Vancouver exchange that will be trying to prospect for metals below the ocean.

Gold to XAU Ratio

Comments: The Gold to XAU ratio is at it again, testing 5.00. Usually values at around 5.00 have resulted in relative buying of the mining shares, but I have a bad feeling about it this time. As I mentioned before, it is possible that the Gold/XAU ratio may have had a "bullish" breakout with a price target of 5.8 to 6.00, which would be very bad for the mining shares--though eventually it would mean a great buying opportunity. All this suggests that GLD and SLV may be better than the miners for now. Let's keep in mind that during the year and a half period of consolidation in 2004 and 2005, the Gold/XAU was well north of 5.00 for 6 weeks. That is quite possible again here because, obviously, we are again currently in a period of major consolidation.

Among the miners, I'm currently looking at CUP (copper not gold, but that's the whole point) and UXG. UXG has been poor but I think that is partly because of the bad experience investors had after their previous merger attempt with their Nevada neighbors collapsed. If they can pull of the merger this time, UXG could potentially enjoy a nice markup, but it is a speculative play. The offer expires March 23, so pretty soon. I also like it because it's correlation to the HUI is relatively low.

My buddy Dean recently sent me an article from the left-leaning NY Times titled "China to Open Fund to Invest Currency Reserves". According to the article, "China will create an agency to invest its immense reserves of foreign currency, now totaling more than $1 trillion, the country’s finance minister announced on Friday."

"They’re not going to be looking for financial assets, but energy assets and natural resources, minerals, things China desperately needs,” said Jing Ulrich, an analyst at JPMorgan.

Although no mention is made of Gold, the mere act of diversifying away from US Dollar-denominated reserves could potentially have positive spill-over effects on Gold.

Following the Commercials

Comments: Last week's Commitment of Traders report showed the largest net short interest in Gold contracts during the last year, which definitely helps explain the action of the last week during which gold gave up around $45. Major tops in Gold have frequently been marked by peaks in the net short interest of commercial traders.

Unfortunately, it typically takes about 8 weeks for this kind of situation to reverse itself so I'm not expecting any huge comeback rallies anytyime soon, though a bounce here seems quite plausible. Hopefully this week's report will show commercial net short interest falling precipitously again.

The COT report is not perfect as a timing device and commercials are not always right. For instance in April to May of 2006, it seemed that the trade went against them as Gold soared higher while net short interest stayed about constant. More often than not, however, commercials have been in control and it has paid to follow them.

Gold to XAU Ratio

Comments: The Gold to XAU ratio flashed an ominous sign on Tuesday by appearing to break out of a long symmetric triangle consolidation. If that is the case, the "price" objective for the ratio would be around 5.7 to 5.8, which would mean continued massive underperformance of the mining shares to Gold for at least several months.

However, it's unclear that it's going to necessarily go that way just yet. The USD has done basically nothing during the last few days and Oil is still well over $60 per barrel so the current action in Gold is a bit strange. However if the Gold to XAU ratio continues to climb above 5.00, the writing will be on the wall for the miners even if Gold maintains itself above $600--which I think would be quite likely.

Comments: Upon a further measurement, it appears that the price target would be 6.00 not 5.80. That is suspiciously close to a potential channel line.