Short-Term Outlook Of Gold

As speculators we are often very quick to impose our theories on the market - we think we know better. Yet, sometimes it is important to take a breath, look at the market, and see what it is telling us. Remember that the market prices in our expectations, not reality. Therefore, the best trades have already been discounted and at the current time it is usually a suckers bet. That is likely where we sit with respect to gold.

Ask a random Joe on the street if gold is a good bet right now - his answer is likely YES, followed by a list of economics 101 arguments which in theory hold true. Yet there’s a reason why those commercials you see about quitting your job and working for 5 hours a week are nonsense. To be a good trader you need to be ahead of the market. You need to be aware of what’s going on in both the market and reality. You need to watch how the market moves when a particular piece of news is released and understand why - not just look at the quotes at the end of the day when all is said and done.

What we are currently seeing according to Mark Hulbert from Market Watch is a very bullish signal from the short term gold timing newsletters. I have only been following this commentary for about 6 months and I have been amazed as to how accurate this indicator has been in the gold market. I usually hear about important updates through Jon Nadler’s daily gold commentary (Today’s). I hope that bullish signal didn’t excite you too much because this is in fact a contrarian signal. Usually when an asset tumbles, sentiment shifts to bearish. Think about this. Gold and the S&P are off similar amounts from their recent highs, yet S&P sentiment is extremely bearish, while gold is extremely bullish. Currently 30.7% of short term timing newsletters are bullish, a higher level than when gold broke its previous supports down to $750.

As we saw with the passing of the rescue bill through congress last week, when an event is priced into the market there is little, if any, upside. Intrade had the odds at 90% of the bill being passed, a reflection of what was priced into the market.

I will say this - Inflation fears are real! How it plays out is unknown. Gold is still pricing in too much inflation sooner rather than later. Deflation is likely reality in the short term, depending on whether or not global governments and central banks are able to put confidence back into the banking sector.

I would still say own a small percentage of gold, it’s just not the right time to cash in your equities and move it in to gold. That trade is already priced into the market.

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Comment by Gordon McCullough

2008-10-14 22:20:13

Look for GOLD to make its move slowly within the next couple of weeks, so slowly that it will sneak up on you that it’s approaching $1100/oz.

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