MIB Update November 15, 2009

Gold and Gold Correlations to Major Commodities & Currencies

1200 50
Gold v.s . Gold/Crude Ratio
45
1000
40
Gold
800 (Left Scale) 35

30
600
25

400 20

15
200
10
Avg. of Last 15 Y
0 Avg. 5
Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Feb-06 Feb-08 Feb-10

900
Over the last two years, it took five
1100
Gold - U$/oz. & Euro/oz. attempts for gold price to finally break
800 above the psychological resistance at
900
U$1000. Though gold has been in a
GoldU$/oz ( left scale ) 700
secular bull market in all currencies,
600 much of the “credit” for the decisive
700
breakout to the all-time high above U$
500 1000 goes to the sliding U$.
500
400
In contrast, gold has yet to make any
300
300 comparable breakouts to new all-time
Euro/oz. (right scale)
highs in the other two big currencies,
100 200
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10
the Euro and the Yen.

As high as the prices appear to be at

its new all-time highs, gold only trades
at approximately the 15-year average
price in terms of crude oil, copper and
silver. The chart of Gold/Crude shows
that currently one ounce of gold buys about 16 barrels of crude, close to the average price for the last 15 years.
 MIB Update November 15, 2009

This suggests that the market is

1200 640000
Gold Futures - Net OI of Swap Dealers and pricing gold in a rational way
1100 Money Managers 560000 rather than pricing in fear of rising
1000 480000 inflation, or of another financial
400000 meltdown in the making.
900
320000
600
800
0 However, when it comes to short-
240000
550 700 Copper (Comex) - Gold/Copper Ratio term pricing market rationality
160000
500 600
2 gives way to trading emotions of
450
80000
4
multitudes of traders of various
500
Avg. of Last 15 Y
0 means, objectives and
400
Avg. 400 6
-80000 sophistication.
350
300 -160000
300 8
Copper (cents/lb)
Jun-06 Jun-07 Jun-08 Jun-09 The gold market, including gold
250 Left Scale
10
equities, has a total capitalization
200 that is only a fraction of the
150 12 capitalization of equity and bond
100 markets. As such, it is periodically
14
50 subject to what, at times, amounts
0 16
Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Feb-06 Feb-08 Feb-10

to manipulation by central banks and large financial firms that trade gold for their own accounts and to facilitate market
liquidity for gold producers and users. Therefore, unless one is a hard core gold bug, making new investments in gold,
following the latest run-up, comes with considerable risk of short term pain.

Among the few gold sentiment indicators publicly available are the weekly CFTC reports on open interest (OI) in futures
and futures options reported for several groups of traders. The CFTC recently re-classified the categories of reporting
traders for 22 commodities, including gold and
80 silver, with the revamped data available back
70 to June 2006 (www.cftc.gov).
60
50
RSI 10 40
The three groups with largest OI are
30 Commercials which now excludes Swap
1200 Dealers, Swap Dealers as a new separate
Gold 1100 class and Money Managers. The featured
1000 chart plots the Net OI held by the latter two
900 groups. Having different trading objectives
RS and functions, their net positions have
LS 800
dominant bias, with money managers being
700 net long and swap dealers being primarily net
H short.
600
However, their net positions fluctuate with
500
changes in gold price, and periodically can
reach extreme levels. Presently, Money
400 Managers hold the largest net long position
since gold first penetrated the $1000 mark in
March’08, only to drop by 30% in the
2004 2005 2006 2007 2008 2009 2010
subsequent 7 months. Swap Dealers that
were heavily net short in March’08 have now even larger net short OI. In contrast, at the October’08 lows Money
Managers were only marginally net long while Swap Dealers were “even”. My interpretation of Net OI of these two
groups leads me to believe that gold is due for a pullback towards the previous resistance level, now a major support,
around $1000.

An argument for such a pullback can also be made from the technical pattern formed on the gold chart, over the last two
years. Edwards and Magee, in their technical classic regard this pattern as a sort of inverted Head & Shoulder bottom.
 MIB Update November 15, 2009

A majority of H&S bottoms mark major trend reversals. In contrast, inverted H&S bottoms appear as consolidation
patterns within a dominant uptrend. The measuring formula (distance between the head and the neckline) projects an
eventual upside target of approximately $1300.