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Avoiding the Gold Trap

The $1,000-dollar-an-ounce mark has taken on a magical aura since gold had failed to break through it twice previously. An old saying on the floor among commodity traders is "there ain't no such thing as a triple top", meaning that the third time up, markets generally follow through. With gold above $1000 today, it would seem the perfect time to get in.

But I don't buy it.

First, the inflation trade has been for me too obvious. Because of it, everyone has seen the logic and been long gold -- at times it has seen tremendous short-term selloffs because the trade has had only buyers and been a 'crowded' trade.

The run-up from $965 we saw just before the holiday is a great indicator of how "crowded" that trade has become: It's only at moments when no one is talking or thinking about gold that it makes its most decisive moves. Right now, everyone's talking about gold. That's not a good sign.

The chart also looks too obvious. I think gold is ripe for what we used to call a "head fake" -- where the breakout looks to be taking off and then quickly reverses, catching everyone long. Under this scenario, I'd expect gold to rally enough to confirm the breakout, maybe for another day or two, then quickly take a dive of perhaps 5% -- forcing many of the "weakies" (investors who cannot sustain a loss) out of the gold market again.
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