October 10, 2009 – The tug-of-war I described in my last commentary has ended. Gold has won another battle in its decade-long bull market by finally breaking through resistance at $1010-$1012, as we can see on the following chart.
Gold’s short-term and long-term uptrends have now been re-confirmed. The $1010-$1012 area should now act as support, but I doubt if we will see those levels. I don’t expect much of a pull-back here. Two things are happening.
First, there is a lot of money parked on the sidelines looking to participate in gold’s break-out as well as to find a safe home. Consequently, I expect any pull-backs to be well bid.
Second, and more importantly, there is presently a scramble for physical metal. I made this point on October 9th in an interview on CNBC Europe.
In my CNBC interview I mention Greenlight Capital, which is a large hedge fund that switched in this year’s second quarter out of GLD, the gold ETF, into physical metal. I believe this switch marks a tipping point from which we will see gold climb much higher. People are increasingly seeking physical gold, rather than paper gold, which is a bullish development.
Note that GLD has less gold now than it did in June (1109 tonnes today vs. circa 1132 tonnes in June). The gold price since June has nevertheless risen by more than $100, proving that gold does not have to flow into GLD for the gold price to rise.
My point is that given the large short position that presently exists in gold, the gold price can rise even if GLD contracts in size. Assuming the gold reportedly backing GLD really exists and isn’t double counted or encumbered in any way, in a contracting GLD the short-sellers will increasingly be forced to cover so that their short position does not become too large a percentage of GLD’s total assets.
The implications for the gold market from the trading action this past week are very bullish. Breaking above $1000 is a major event. It is a worldwide wake-up call that the global monetary problems arising from mismanaged fiat currencies are worsening.
In my view, a 3-digit gold price is history, just like a 3-digit price was never seen again when the Dow Jones Industrial Average finally hurdled 1000 in 1983.
Traders – For my specific recommendations, see Trading.