Originally published September 13th, 2009.

Investors will much more readily forgive a market commentator who is bullish and wrong than one who is bearish and wrong. This explains why, with gold tantalizingly close to breaking out to new highs, bearish or cautious articles on the yellow metal are few and far between. Amongst the bullish commentaries we have Jim Willie's "13 reasons for major Gold Breakout" and the "A light goes on in Russell's brain" by the venerable Richard Russell. On www.clivemaund.com we are pragmatists whose overriding concern is to make money, or at least avoid losing it, and whilst we are well aware of the bullish case for gold and the convincing upbeat arguments of many writers, we also keep a lookout for bearish signals, and there are some important ones at this time. As a result of these mixed signals we have remained perched on the fence in recent weeks, during a period in which gold has broken out upside from an important large triangular pattern, but has not thus far succeeded in breaking out to new highs. Does this fence sitting mean that we have foregone the opportunity to garner profits in this market? - no sir, it does not. We very rarely consider "straddle" options because of the doubled decay burden of the time value of holding both Calls and Puts, but having called the breakout by gold from its Triangle days before i occurred, we decided to boldly go (go boldly?) and load up with heaps of cheap Calls and Puts in gold itself on the NYMEX and in iShares Comex Gold Trust, SPDR Gold Trust and Newmont Mining, with an eye to using the Puts to protect long positions in gold stocks generally as well. The trade worked out perfectly as we offloaded all the Calls for a whacking great profit into strength early last Tuesday morning when gold formed a short-term peak, and we hung on to the Puts. The gains on the Calls vastly exceeded the losses on the Puts, and if things now turn sour we might easily recoup our losses on the Puts and even end up gaining. In any event we now have a heap of cheap Puts free and gratis which go at least some way to insulating our stocks positions from losses. The other approach that we employ to maximize upside gearing and minimize downside is to go with the stocks of younger dynamic mining companies that are either going into production or close to doing so, and thus in the accelerated growth phase of their stock lifecycle, avoiding the lumpen old monster stocks that matured a long time ago. We should not forget, however, that investors and speculators will dump everything indiscriminately over the side, regardless of quality or intrinsic value, if a broad based selloff sets in.

Now we will take a fresh look at gold in the light of the latest price action and COT data. On the 3-year chart we can see how gold duly broke out upside from its large triangular pattern and rose sharply, which was the scenario assigned the higher probability. With all moving averages in bullish alignment it's a case of "so far, so good" but we note that it is now increasingly overbought and has risen into the zone of very heavy resistance approaching its highs. Much more worrying for gold bulls is the explosion in the Commercials' short positions, which have risen "off the scale" - we will look at this a little later.

This is a good point at which to ask ourselves the question - "What is the scenario that would cause maximum damage to the average PM sector investor, and at the same time funnel his resources most efficiently into the pockets of Big Money?" This is an easy one to answer - it would be a gold breakout to new highs that would trigger a wave of buy stops and lead to many chart followers and a broad swath of investors piling in. Having "lobster potted" the majority Big Money could then engineer a savage reversal and plunge and you had better believe that they have got the clout to do it - this is the game they played with copper last year.For this reason there is no way we are selling our Puts, which we ended up getting for free anyway, and we will roll them if they expire.

On the 6-month chart we can examine recent action in more detail. After the sharp breakout from the Triangle, gold rose strongly for another day before the rally was slowed considerably by the heavy resistance approaching the highs. We sold our Calls at the top of the "shooting star doji" in the early trade last Tuesday. A bullish hammer appeared after some reaction on Thursday that was followed by gains on Friday, however, the price did not rise above Tuesday's intraday high. Gold is getting into critically overbought territory on its RSI indicator with its MACD showing an increasingly overbought condition, and as is very obvious on its 3-year chart, it is in a zone of heavy resistance. These factors in themselves do not preclude a breakout to new highs soon, although they do suggest that a period of consolidation first would be beneficial. However, what does make it look a lot less likely short-term is the COT structure, which according to past correlations now looks decidedly bearish.

On www.clivemaund.com we don't subscribe to the David versus Goliath nonsense. This is because in our experience Big Money almost always wins, which is hardly surprising given their extensive network of connections throughout the banking system, governments, the markets and policymaking in general - they know what's going down and when. Even when it looks like they are going to lose, as during the banking crisis of last year and early this year, they simply push the bill for the consequences of their excesses onto everybody else. We therefore aim to align ourselves with them as much as possible. You have as much chance of winning when you oppose them as a hedgehog has of making it across a freeway south of Los Angeles. Bearing this in mind the latest COT chart is, or should be, disconcerting for bulls, for as we can see the Commercial short position exploded according to the latest data, which does not include the last 3 days of last week, so it can be presumed to have climbed to even higher levels as gold finished the week at a closing high. This means one of two things - either Big Money are going to have their heads handed to them on a plate as gold breaks out and rockets higher (historically unlikely), or the average investor in the PM sector, egged on by the plethora of bullish gold reports doing the rounds, is going to end up as roadkill before much longer, which could involve a false breakout to new highs and a concomitant explosion of Commercial short positions to an even greater extreme. The silver COT chart is even more extreme. Our tactics are therefore generally to remain long but to protect positions either with close stops, which before the Triangle breakout were just below the support at the apex of the Triangle for, but should now be raised, or with out-of-the-money Puts. This position will be reviewed if the COT structure becomes even more extreme. An additional factor that needs to be taken into account by PM stock investors is the increasing likelihood of the broad stockmarket breaking lower as it is now approaching the apex of a bearish Rising Wedge pattern and the time of year when investors are most prone to get jittery.