Mib 091116 Update

MIB Update November 15, 2009

Gold and Gold Correlations to Major Commodities & Currencies 50

1200 Gold v.s. Gold/Crude Ratio

45 1000 40 Gold (Left Scale)

800

35 30

600 25 20

400

15 200 10 Avg. of Last 15 Y 0 A Jan-94 Jan-96 Jan-98

Jan-00

Jan-02

Jan-04

Feb-06

Feb-08

5 Feb-10 900

Gold - U$/oz. & Euro/oz.

1100

800 900

GoldU$/oz ( left scale )

700 600

700

500 500 400 300

300 Euro/oz. (right scale)

100 Jan-00

Jan-02

Jan-04

Jan-06

200 Jan-10

Jan-08

1200

50 Gold v.s. Gold/Crude Ratio 45

1000 40 Gold (Left Scale)

800

35 30

Over the last two years, it took five attempts for gold price to finally break above the psychological resistance at U$1000. Though gold has been in a secular bull market in all currencies, much of the “credit” for the decisive breakout to the alltime high above U$ 1000 goes to the sliding U$. In contrast, gold has yet to make any comparable breakouts to new all-time highs in the other two big currencies, the Euro and the Yen. As high as the prices appear to be at its new all-time highs, gold only trades at approximately the 15-year average price in terms of crude oil, copper and silver. The chart of Gold/Crude shows that currently one ounce of gold buys about 16 barrels of crude, close to the average price for the last 15 years. This suggests that the market is pricing gold in a rational way rather than pricing in fear of rising inflation, or of another financial meltdown in the making. However, when it comes to short-term pricing market rationality gives way to trading emotions of multitudes of traders of various means, objectives and sophistication.

600 25 20

400

15 200 10 Avg. of Last 15 Y

0 A Jan-94 Jan-96

Jan-98

Jan-00

Jan-02

Jan-04

Feb-06

Feb-08

5 Feb-10

The gold market, including gold equities, has a total capitalization that is only a fraction of the capitalization of equity and bond markets. As such, it is periodically subject to what, at times, amounts to manipulation by central banks and large financial firms that trade

MIB Update November 15, 2009

1200 1100

640000

Gold Futures - Net OI of Swap Dealers and Money Managers

560000 480000

1000

400000

900

320000

800

240000 700

160000

600

80000

500

0

400

-80000

300 Jun-06

-160000 Jun-07

Jun-08

Jun-09

gold for their own accounts and to facilitate market liquidity for gold producers and users. Therefore, unless one is a hard core gold bug, making new investments in gold, following the latest run-up, comes with considerable risk of short term pain. Among the few gold sentiment indicators publicly available are the weekly CFTC reports on open interest (OI) in futures and futures options reported for several groups of traders. The CFTC recently re-classified the categories of reporting traders for 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 70 60 50 40 30 1200 1100 1000

RSI 10

Gold

900 RS

LS

800 700

H

600 500 400

2004

2005

2006

2007

2008

2009

2

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