Weekly Review of Gold as of the Week Ending 2-12-2005

Precious Metal Bulls received a delightful Valentine's present this week with the stunning performance of Silver and the very respectable showing in Gold along with the weekly outside reversal in the HUI index.

March Silver closed at $7.21, up .575 points for the week and .720 points off its weekly low staging a massive weekly outside reversal on the charts. April Gold meanwhile closed at $422.00, up $6.10 for the week and $11.00 off its weekly low. Though not as impressive of a weekly close on the price charts as Silver managed to secure, nonetheless, there are some notable doings in the Yellow Metal that can give the bulls some long overdue consolation.

First of all, let's start with the WEEKLY CONTINUOUS GOLD CHART to see how things are shaping up. Please note that since this entire bull market in gold began back in early 2001, gold has spent very little time below the 50 Day Moving Average on the Weekly Chart (50 DMA - the solid blue line). By close observation of the price chart, you can see that forays below the 50 DMA have been few and far between with the price spiking below this level occasionally but rarely closing beneath it. As a matter of fact, the weekly closing price of gold has been beneath the 50 DMA only SIX TIMES since the beginning of 2002, or SIX WEEKS out of 162 as of this date.

This week proved to be no exception to that pattern. Gold spiked beneath the 50 DMA early in the week but did manage to shake off that selling pressure enough to claw back higher as the week came to an end. From a technical standpoint, that is a big plus for the bulls and a major disappointment for the bears who clearly failed to seize the advantage in this market especially in light of all they had going for them - (1) the negative publicity surrounding the all-too-obvious ploy of Gordon Brown of England and his ill-conceived IMF gold sale scheme; (2) a proposed federal budget with supposedly austere measures to bring the runaway federal deficit back under control; (3) a rallying dollar; (4) and what has become an increasingly obvious case of spin by Alan Greenspan who more or less dismissed the gaping U.S. Current Account Deficit as a thing of little to no consequence in his speech on Feb 4, the adjustment of which will prove to be a fairly simple and uneventful matter in the Chairman's esteemed opinion, complete of course with his usual obfuscations and caveats (note - that opinion is subject to revision within the next month or two as anyone who follows the Chairman's speeches has soon learned to anticipate). If this is the best the bears could do given the ammo they had to fire, they are in for a rude awakening.

Back to the gold chart once again - please observe that gold is still well within its solid, THREE PLUS YEAR uptrend channel and is well above the lower channel boundary. From a purely technical standpoint, Gold could drop to the $390 level and not a single bit of damage would be done to the LONG TERM Bull Market in spite of the shorter term technicals becoming bearish - something to keep in mind when you hear predictions of gold's imminent demise.

Now if you would, please refer to the RSI chart immediately above the price chart. If you will notice, the RSI is still above the 40 level which has served to hold price setbacks going back to 2001 when gold began this multi year bull market. By any classic definition, gold is performing admirably. Dips are being seen as buying opportunities by long term oriented investors who are using periods of price weakness to accumulate more of the metal.

Lastly, we turn our attention to what I consider to be perhaps the most remarkable development in the gold market and that is the Commitment of Traders. Please refer to the chart below as I make my comments.

This week's release of the COT data reveals that there has been a huge change in the internal composition of the gold market over the course of the last two months. The big trading funds (dark blue line) are now at their lowest NET LONG POSITION since October 2002 when the gold price reached a low near 310. Please refer to the price chart above and see the BLUE ARROW which indicates where the price of gold was when the funds last held a net long position anywhere near this size.

The commercial category has also undergone a dramatic change. They are now at their lowest NET SHORT POSITION since August 2002 when the price of gold reached a low near 298. You can see that marked by the DARK RED ARROW on the gold price chart.

Now look at the price action on the gold chart since those two dates and you will observe that the gold price has not dropped below those levels again. In other words, the current composition of the gold market is necessitating a further SUBSTANTIAL reduction in the FUND NET LONG position requiring them to adopt a NET SHORT position if the gold price is to be pushed much lower. Should that occur for some unlikely reason, the commercial category will more than likely have made the transition to a NET LONG position for the first time in more than three years.

Here is another interesting tidbit. Since 2001, there have been THREE sizeable price reactions in this ongoing bull market. The first occurred in February 2003 and took gold from $390 down to $320, a drop of $70, over the space of two months (note - I am rounding off the gold price for the sake of illustration). The second occurred in April 2004 and took gold from $430 down to $370, a drop of $60, in a period of some six weeks. The third is what has occurred since the last week of November 2004 which has taken gold down from $460 to the current reaction low of $410, a drop of $50, in a period of 2 ½ months. While these price reactions are painful for the bull camp, notice that as of now, the setbacks are becoming progressively shallower before the next leg up commences. Translation - buyers are not waiting as long before re-entering the fray. They are accumulating at higher levels.

Now please refer to the next chart below which shows the FUND NET LONG POSITION as a simple percentage of the TOTAL OPEN INTEREST (FNL%TOI) and let's look at what this graph tells us in regards to these three price reaction periods.

During the first price reaction which began in Feb. 2003, the FNL%TOI reached a low point of 11.28% before the reaction was over and the price moved back up again. During the second price reaction beginning in April 2004, the FNL%TOI reached a low of 8.79% before the price found buying support and moved up again. During this third price reaction which commenced in the last week of Nov. 2004, the FNL%TOI has now reached a new low point of 4.38%, the lowest point since August 2002, that same period we referred to above in the preceding section on the COT data.

Here is the analysis - Each of these three reaction price setbacks has seen the FNL%TOI reach successively lower levels. In other words, in spite of the fact that more FUND LONG LIQUIDATION as a percentage of the total open interest has occurred with each major price setback over the last two years, the corresponding gold price drop has been successively shallower. First, a drop of $70, then $60, and now thus far, $50, even though there has been more fund net long liquidation on a percentage basis on each occasion. What this tells me as a trader analyzing this market is that more and more buying is emerging on each of these larger price setbacks in gold and that the buyers are absorbing successively larger amounts of selling - so much so that gold's price dips are becoming more and more shallow. That can only bode well for the gold price as we move forward into this generational bull market in gold.

I make no claim to predict the future; as a trader I have learned that can be hazardous to one's financial health. Guesses and hunches are just that - guesses and hunches; and one man's are as good or as bad as the next's. However, we can extrapolate based on previous price action and market internals. If we are correct in our assessment, we will profit; if not, hopefully we are wise and disciplined and will not get hurt too badly by prudent money management methods. There is no shame in being wrong about a market's direction - there is however shame in being too foolish to protect yourself from yourself!

From where I am currently sitting, the gold market is thus at an important crossroads - if the past history of this fledging bull market is any guide, it will not be long before gold begins its next leg up. For it to breakdown much further at this point, a sea change would have to occur in which gold's role as an alternative currency would no longer be required by current global economics and geopolitical fundamentals. Only something of that nature could induce these increasingly aggressive buyers and/or investors to discard it from their portfolios and speculators to attack it relentlessly driving its price down substantially from here. What those changes might be escapes me given the nature of the world in which we find ourselves.