Why I'm Still Being Cautious as Gold Hits New Highs

| About: SPDR Gold (GLD)

Wow, if the market always behave like this when I’m away, maybe I should take more vacations! The rather unexpected 50 bps cut lit a fire under the market, and no other sector reacted as positively as the commodities, including precious metals.

The Amex Gold BUGS Index (HUI) challenged its old high of 401.69 as spot gold surpassed the old high of $730 reached in May 2006. However, I would urge a little caution amid this exuberance. From the Aug. 16 bottom of 284.85, I can clearly count 5 waves up which indicates that a short-term top may be near. Moreover, as I have pointed out before, the PM complex has a habit of taking 3-4 tries to overcome a significant resistance level which the 400 on the HUI certainly qualifies. So how long, if a correction should come, will it last? In terms of time, it could be anywhere from 50% to 100% of the preceding advance. It’s been almost 5 weeks since Aug. 16, so a correction could last anywhere between 3 to 5 weeks.

I plan to take on some more speculative positions on the coming dips. Within the PM complex, I continue to favor silver over gold given their present valuations. As can be seen from the $silver:$gold ratio, the price of silver is nowhere near its 2006 high. Additionally, current silver COTs are far more favorable to gold’s which reveals large recent increases in commercial short positions.

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