(This is an excerpt from Friday's blog for Decision Point subscribers.)
After recently trying to go vertical, gold took a week off for a correction. As you can see on the chart below, the correction has been minor, but it has been sufficient to turn one measure of sentiment slightly bearish.
Central Gold Trust (GTU) is a closed-end mutual fund, which means that it trades like a stock on the NYSE. The fund owns only gold -- the metal, not stocks. Closed-end funds trade based upon the bid and ask, without regard to their net asset value (NAV). Because of this, they can trade at a price that is at a premium or discount to their NAV. By tracking the premium or discount we can get an idea of bullish or bearish sentiment regarding gold.
As of Thursday's close, GTU traded at a slight discount to its NAV, which I thought was quite unusual, considering the overall enthusiasm for the metal.
Taking a longer-term look below we can see that this is the first time GTU has sold at a discount since mid-2008. We can also see that prior to 2008 that it was common for GTU to sell at a discount, even though gold was in an up trend. That changed in 2008 and 2009 when the global financial crisis began to unfold and the desire to own gold rose to frantic levels -- so frantic that GTU was selling at premiums approaching 35%.
So, what does it mean? To begin, I don't think we are headed for the kind of discounts seen in 2006 and 2007. That was a time when the world was not all that interested in gold, and GTU had nice discounts in what was essentially a rising gold market. We are now in a time when the world has "discovered" gold and gold is really taken seriously as an inflation hedge and a shield against radical Fed policies.
Nevertheless, it is interesting to see the drop in premium over the last several months, most of which was during a rising market. For now I think I have to interpret it as nervousness on the part of traders, as gold kept making new all-time highs. Since we look at this as a sentiment indicator, current relatively bearish levels probably indicate that a trading low is near.
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BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
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Copyright 2010 Decision Point. Nothing herein should be construed as an offer or solicitation to buy or sell any security. Past performance does not indicate future results.
