There are several things that I would like to bring up right now. The first is the nature of the buying that has been driving this market higher since the first of the year. Gold started 2014 near the $1,200 level and has since then put on $140, the largest portion of that this month when it moved $100 higher.
Based on the COT reports since the beginning of this new year, one can easily observe that the largest portion of the buying this year has come from whole scale short covering. Here are the numbers:
At the beginning of the year, the Hedge Fund OUTRIGHT short position consisted of 72,571 futures contracts and options. As of Tuesday this week, that position was 30,996. Doing the math, we can see a reduction of 41,575 short positions or short covering.
That same Hedge Fund category had a OUTRIGHT long position of 106,675 futures contracts and options. Tuesday this week shows a build in that same position to 144,907. The math - an increase of 38,232 positions on the long side.
In other words, short covering by the gigantic hedge fund community has outnumbered the amount of new buying by that same category in the amount of 3343 futures contracts and options since the start of 2014.
This is not a recipe for a sustainable bull market. One wants to see eager, strong, abundant fresh buying driving a market higher because it is a reflection of bullish sentiment, not a wave of aggressive short covering which once it fades, drops the upside momentum. Now, whether we can see something which will spur traders/investors to pile onto the long side with a greater fervor than the short which have been getting out remains to be seen, but until we do, caution is still warranted towards this market. The one thing about rallies led primarily by short covering is that they tend to fade quickly. We'll see what we get to begin the new month.
By the way, as a side note, for you folks over at a certain paid-subscription newsletter site that enjoy taking the articles posted here and republishing them nearly verbatim without giving credit to where you got them, I have not included a chart of the above so that you can at least add something of your own when you indulge your inclination to plagiarize.
Take a look at the chart below however and you can see the extent of the move this year but you can also see the obvious resistance zone that has formed up at $1,340.
The Directional Movement Indicator is showing the ADX line rounding over. It has stopped moving higher which in itself is a warning sign that there exists the potential for a halt in the uptrend. While bulls still remain in control of the market, upward progress is stalling indicated by the falling Positive Directional Movement indicator ( Blue Line ).
Dip buyers have thus far emerged in gold and kept it from breaking down sharply but if the physical market buyers begin to back away and wait for lower prices, I am skeptical that buying from Western-based investment sources will be sufficient take the price through this overhead resistance zone against which it is currently being held in check.
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