SliderOnTheBlack.com

Given all the noise and rumors about new, additional IMF gold sales yesterday, I thought it would be a good time to take an updated look at trading charts for both Gold and the HUI Gold Bugs Index.

For an update on the final communique of the G-20 and the IMF, please see my preceding post. No new additional IMF sales were announced, only an affirmation of existing, scheduled sales:

http://www.sliderontheblack.com/usdollargold/gold-5-trillion-reasons-to-tune-out-all-the-g-20-imf-noise/

Before we get to the charts, I thought I would share this little tidbit…

How would you like an inside peek at how the Central Bankers have been positioning themselves, and how they’re investing their own money?

Here’s a quote from an article written by Peter Oborne that appeared Monday in the London Times:

http://www.dailymail.co.uk/debate/columnists/article-1165417/PETER-OBORNE-Disloyalty-Humiliation-The-week-Browns-grand-vision-brutally-shattered.html

“A sinister plot to protect the pension pot?

I believe I have stumbled across one of the most remarkable stories of the entire credit crunch.

At the end of 2006, the Bank of England pension fund made a sudden and very extraordinary decision. It sold all the equities in its portfolio and invested them in index-linked gilts - even though it realised that such a move would increase the annual cost of the pension fund by some £45million.

Looking back, this was a brilliantly farsighted decision because shares have since fallen in value by almost 50 per cent. It seems clear the the Bank of England fund managers understood the nature of the looming economic crisis well before anyone else.

At the time, they said their decision was based on concerns about ‘unsustainable’ positions in credit markets and the consequences of a possible credit crunch. When I put this story to a Bank press officer yesterday, it was dismissed as ‘absolute nonsense’.

But I remain confident of my sources. Indeed, the move from equities to gilts raises a very awkward question: did the Bank of England foresee what was coming as early as 2006 - yet did little about the impending crash, apart from protect its staff’s own pension fund? “

Well, here’s the proof to Mr. Oborne’s allegations, an actual peek behind the curtain of the Bank of England’s own pension fund. You can read the entire report here:

http://www.bankofengland.co.uk/about/humanresources/pensionreport.pdf

It appears the Bank of England pulled off some rather dazzling market timing dumping all stocks just before the global market crash. They repositioned the portfolio to a 71% weighting in inflation protected bonds, basically the same as U.S. TIPS… achieving a 12% return for the one year reporting period.

Chart from Guido Fawkes…

And now some thoughts on gold…

We’ve seen a rotation of momentum funds out of gold and into the broad market, chasing a bear market rally that was ignited by an Obama administration PR Tour, which included the appearance of Ben Bernanke on “60 Minutes”, a sitting President appearing on the Jay Leno Show, and telling America it was a great time to buy stocks.

The administration followed that up with the well telegraphed intention to eliminate FASB-157 and market to market accounting, basically turning the US Banking system into a giant Enron accounting scheme.

And with a little help from the PPT, the sheeple followed, pouring into stocks as central bankers worldwide continue to create trillions of dollars out of thin air, as jobs collapse, as real estate prices remain in free-fall, as consumer credit get’s turned off, as GM & Chrysler teeter on bankruptcy, as auto sales worldwide evaporate, as the baltic dry index rolled over, and as the next shoe to drop - commercial real estate, begins to roll over.

So what does all of that mean to gold bugs?

– It means we have not seen our last stimulus package.

– It means we have not seen our last bank bailout.

– It means central banks are not done creating trillions (no longer billions) out of thin air.

– And it means the momentum players, like the swallows of Capistrano, will return… to gold.

Patience, and anticipation continue to be the two most elusive elements among gold traders.

You would think that after the rather blatant smackdown of gold the morning that Ben Bernanke dropped his “Quantitative Easing Bomb” on the markets, that gold bugs would begin to anticipate the smackdowns around major events. But yet this smackdown driven by rumors about new, additional IMF Gold sales on the day the G-20 released it’s final communique, seemed to rattle the mettle of metal heads every where.

All noise.

No new IMF gold sales. Just another trillion dollars created out of thin air.

And you were worried about gold?

C’mon.

No road traveled worth the journey, is absent twisting turns, and an occasional pot hole.

Anticipate them.

And remember, you can not profitably buy pullbacks, or panics, unless you already sold something into the rallies. You must continually take something off on those days when everyone chases gold, and add something back on those days when rumors stampede the herd out the exit doors.

If the underlying fundamentals change… I will tell you so.

No pom poms, or poodle skirts found here.

Never have been, never will be.

Technically, gold is still in a bullish uptrend. We finally had a bullish cross of the 50 & 200 day moving averages in mid February, and gold remains comfortably above it’s 200 day moving average.

So what should you do when they decide to pound down gold, when the underlying fundamentals are so strong?

I wrote about that on my Silicon Investor forum thread here:

http://siliconinvestor.advfn.com/readmsg.aspx?msgid=25502122

In addition to adding puts as insurance into the rallies, or merely taking some chips off the table, so as to be able to buy the pullbacks… option straddles and strangles offer trades on volatility itself, and not just on direction.

If the market is giving you a trade on volatility - take it.

Gold traders always seem adverse to adding puts, or taking a little off the table into rallies, as every rally is met with pronouncements from the gold bug punditry, that this is “it” — “the big one.” The time to take some chips off the table isn’t during smackdowns when selling begets selling, it’s on the rallies.

If you haven’t taken anything off the table, added puts as insurance, or utilized option straddles, or strangles as a trade on volatility itself, then your last remaining weapon is stops.

Presently, gold is seeing a convergence of it’s 200 day moving average directly into the bottom of it’s current trading channel at $860ish. And given the ride we’ve had off the October $681 lows, shame on anyone who gives back anything sub-$860ish.

Making money trading gold, or commodities has never been the problem.

Hanging onto the money you made, is the problem.

Use stops.

The underlying fundamentals for gold could not be better as Central Banks have unilaterally engaged in quantitative easing and competitive currency devaluations. And with the world’s first globally coordinated stimulus package totaling an already staggering $5 Trillion Dollars, about to be injected into the global economy, the future remains bright.

For gold stocks, the HUI Gold Bugs Index has been trading within a narrow trading range of late, and actually broke out just above the resistance, before this present smackdown.

If you took something off the table on this rally into HUI 320-340 and have used tight trailing stops, then you can now profitably, begin to buy into this pullback. I would be patient here. The market likes to test round numbers, and given this smackdown, I would anticipate them trying to push the HUI back sub 300.

If they are successful, I would anticipate funds to step back in at HUI 280-285, as long as gold remains within it’s bullish uptrend, and holds it’s 200 day moving average.

And what if we don’t see HUI 280-285?

You can always add on strength.

Traders should be using laddered stops here. We are still setting on an index double off the October lows. Job #1 is to not give it back.

Here’s an updated chart on the current trading channel for the HUI Gold Bugs Index. Gold stocks have finally fought out of the October to December abyss, where we saw mass liquidation and forced selling from hedge funds.

Strong support lies at HUI 250, and we have now picked up new resistance levels of HUI 359, the levels of the double top, from last August, and September. On the breakout beyond this resistance levels, I believe we will finally see gold stocks rapidly close their valuation gap to the price of gold,
and potentially test new highs.

Be patient here. Gold stocks were due for a pullback, as they got a little ahead of the gold price here.

Funds established major gold stock positions prior to the G-20 meeting, and they are not dumping those positions here. This is hedge funds leaning short on the exit of momentum players, who have rotated out of the gold trade and into the bear market rally.

This too, shall pass.

For the HUI to break through resistance, and out of this trading range, we need gold to rally. If they are successful in keeping gold muted, then continue to play the “trading range game” with the HUI, and continue to buy physical gold (held in hand) with your paper trading profits.

Be patient & prudent on your re-entries here, and be confident in doing so, because the G-20 and the IMF have just given you $5 Trillion reasons to be so.

SliderOnTheBlack