MIB Update November 15, 2009

Gold and Gold Correlations to Major Commodities & Currencies

1200 50
Over the last two years, it
Gold v.s. Gold/Crude Ratio took five attempts for gold
45 price to finally break above
1000 the psychological resistance
40 at U$1000. Though gold
Gold has been in a secular bull
800 (Left Scale) 35 market in all currencies,
much of the “credit” for the
30 decisive breakout to the all-
600 time high above U$ 1000
25 goes to the sliding U$.

400 20 In contrast, gold has yet to

make any comparable
15 breakouts to new all-time
200 highs in the other two big
10 currencies, the Euro and the
Avg. of Last 15 Y Yen.
0 A 5
Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Feb-06 Feb-08 Feb-10
As high as the prices appear
to be at its new all-time
900
Gold - U$/oz. & Euro/oz.
highs, gold only trades at
1100 approximately the 15-year
800 average price in terms of
crude oil, copper and silver.
900 GoldU$/oz ( left scale ) 700 The chart of Gold/Crude
shows that currently one
700
600 ounce of gold buys about
16 barrels of crude, close to
500 the average price for the
500 last 15 years.
400
This suggests that the
300 market is pricing gold in a
300
Euro/oz. (right scale) rational way rather than
pricing in fear of rising
100 200
inflation, or of another
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10
financial meltdown in the
making.
1200 50
Gold v.s. Gold/Crude Ratio
However, when it comes to
45
1000
short-term pricing market
40 rationality gives way to
Gold trading emotions of
800 (Left Scale) 35 multitudes of traders of
various means, objectives
30 and sophistication.
600
25 The gold market, including
gold equities, has a total
400 20
capitalization that is only a
fraction of the capitalization
15
200
of equity and bond markets.
10 As such, it is periodically
Avg. of Last 15 Y
subject to what, at times,
0 A 5 amounts to manipulation by
Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Feb-06 Feb-08 Feb-10 central banks and large
financial firms that trade
 MIB Update November 15, 2009

gold for their own accounts and to

1200 640000 facilitate market liquidity for gold
Gold Futures - Net OI of Swap Dealers and producers and users. Therefore,
1100 Money Managers 560000
unless one is a hard core gold
1000 480000 bug, making new investments in
gold, following the latest run-up,
400000
900 comes with considerable risk of
320000 short term pain.
800
240000 Among the few gold sentiment
700
160000 indicators publicly available are
600 the weekly CFTC reports on open
80000 interest (OI) in futures and futures
500 0 options reported for several
groups of traders. The CFTC
400 -80000 recently re-classified the
300 -160000 categories of reporting traders for
Jun-06 Jun-07 Jun-08 Jun-09 22 commodities, including gold
and silver, with the revamped data
available back to June 2006 (www.cftc.gov).

The three groups with largest OI are Commercials which now excludes Swap Dealers, Swap Dealers as a new separate
class and Money Managers. The featured chart plots the Net OI held by the latter two groups. Having different trading
objectives and functions, their net positions have dominant bias, with money managers being net long and swap dealers
being primarily net short.

However, their net positions fluctuate with changes in gold price, and periodically can reach extreme levels. Presently,
Money Managers hold the largest net long position since gold first penetrated the $1000 mark in March’08, only to drop
by 30% in the subsequent 7 months. Swap Dealers that were heavily net short in March’08 have now even larger net
short OI. In contrast, at the October’08 lows Money Managers were only marginally net long while Swap Dealers were
“even”. My interpretation of Net OI of these two groups leads me to believe that gold is due for a pullback towards the
previous resistance level, now a major support, around $1000.

80
An argument for such a pullback can also be
70 made from the technical pattern formed on the
60 gold chart, over the last two years. Edwards
50 and Magee, in their technical classic regard
RSI 10 40
30 this pattern as a sort of inverted Head &
1200 Shoulder bottom. A majority of H&S bottoms
Gold 1100 mark major trend reversals. In contrast,
1000 inverted H&S bottoms appear as consolidation
900
patterns within a dominant uptrend. The
RS measuring formula (distance between the head
LS 800 and the neckline) projects an eventual upside
700 target of approximately $1300.
H
600

500

400

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