Tuesday, May 29, 2007

Crying Bull

Crying bull, you know, it’s just like crying wolf, except you yell “bull” instead. Seems like this is what gold bugs been doing for over half a year now. I myself certainly have been guilty of that to a degree. Fortunately, I have also been buying when the selling goes out of hand and the great majority of my PM positions enjoy healthy gains.

Here I want to take a look at the wave structure of HUI in time that is suggestive of a turning point at hand. The two charts below compare the early part of this PM bull market (chart 1) with the current correction (chart 2). The particular wave designations may be in contention; nonetheless, the point here is to look at the relative time lapse of a correction following a powerful up leg in the HUI. Chart 1 clearly shows the pair to be substantially equal in time. The current correction, depicted in Chart 2, has also lapsed more or less equal time with the preceding up leg. Thus if this rhythm were to continue we would expect an imminent up tick soon. We also know that the current wave is unfolding at around half the pace (52 vs. 27 weeks). Furthermore, wave 3 of the previous wave of large degree is approximately 50% longer than 1 and 2, so the next up leg may last a year and half, culminating around the next presidential election.

Commitment of traders (COT)
It’s hard to place a lot of faith in a simple relationship like that, but at least the current COT is conducive to a PM advance. Both gold and silver COTs show a large drop in the commercial net short positions. Since this data did not include last Thursday’s drop which was past the Tuesday cut-off, the actual commercial short position should be even smaller. In gold, the open interest (OI, the green line behind the bars in the figure) has steadily climbed even as commercial net short decreased, so the commercial net short as a percentage of OI is amongst the lowest ever. It also begs the question of whether long term investors are weighing in. I would also urge a look at the most recent commentary from Ted Butler on the composition of the commercial traders which could be earth shattering if his predictions are realized.

If PMs are in a secular bull market as I believe, then the bull will resume at some point. As a trader, I don’t believe in anticipating a turn, but if I were to learn anything from the boy that cried wolf, it’s to be ready when the big, bad wolf (or bull) does come.