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In the last update, published on or after 16th April, we expected gold to drop back from the $690 area due to the bearish COT structure, and that is what has happened. The latest COTs are not good news for bulls, with the Commercial shorts still at a high level - high enough to preclude a significant advance in the near future, and to maintain the risk of a substantial decline.
On the 2-year chart we can see how gold is being shepherded higher by its long-term 200 and 300-day moving averages, but as it lacks the oomph to get on with it and break out above last year’s highs around $730, it is now rolling over and being forced into an increasingly confined space between the trendline shown, or at least the moving averages, and the overhead resistance at and towards $730. The situation is clearly becoming increasingly tight which must force a breakout one way or the other soon, and sadly for the bulls, the latest COT figures show that the risk right now - or as of 3 days ago, as the COT figures are released 3 days late in order to give big money and insiders the edge - is to the downside, notwithstanding any brief rally. The fact that the April high was only a little above the February high is also a sign of weakness. What we will need to see in coming weeks, or over the next month or two, as a prerequisite for a gold breakout above $730, is a significant improvement in the COT picture, with a much lower Large Spec long and Commercial short position. In the meantime, traders should be prepared for surprises to the downside. If gold does break below first the trendline and then its long-term moving averages, it will at best lead to a large extended trading range developing between the strong support in the $550 - $570 area and the resistance at last year’s highs around $730. At worst it will mean that a Double Top has formed and the bull market is over.
The COT chart shows the extent of the Commercial short position and the Large Spec long position that are thought to be at a level that will prohibit any significant advance in the near future while at the same time making downside risk considerable. Traders should orient themselves accordingly. Enrico Orlandi, in an article published recently on the 3rd May, made the following observation about the Commercials: “What I'm trying to say here is that people buy gold for the wrong reasons. If your reasoning is wrong, then it's almost a sure bet your timing will be wrong. Enter the Commercials: very large, sophisticated, smart, unemotional traders who make their living off of people with faulty reasoning. And they've got it down to a science. They suck you in, clean you out, and send you home packing and a lot poorer for the experience.”
Clive Maund
resourcecharts@yahoo.com
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