Thursday, June 28, 2007

Another look at the XAU put/call ratio

If I had to use a single word to describe the actions in gold/silver in recent days, it would have been "painful". Many gold "gurus" rushed to forecast lower prices Tuesday's $11 drop (at its lowest point). It behooves us to once again look at the XAU put/call ratio as a contrarian indicator.

I have previously called this a "mildly useful indicator". Indeed, we have seen a number of spikes in this ratio to the range of 3-4. More often than not, such a spike is followed by 3-4 days of upside action. On Tuesday however, this ratio was above 5. The last spike of this magnitude occured at the low of this correction, where HUI bottomed at 275, some 15% lower than where it is now. As sentiment indicators go, the closer they are to the extremes, the more reliable they are; and the fear in gold investors was pretty palpable on Tuesday.

Recall the time analysis I posted on May 29. The HUI made a low of 317.7 on the very next day. This past Wednesday, HUI dropped to as low as 317.81 before turning higher. I can't predict if 317 will hold, but buying when fear is rampant has been a good recipe for this bull market in gold.