Fool’s Gold?

Once again, I’m talking about Gold. A few months ago, I was expecting a sharp drop, which did occur. However, the subsequent bounce has been stronger than I expected. I still believe that gold will weaken soon, and if it does make a marginal new high, it won’t be sustained very long.


In the first chart above, the 3y weekly chart, notice that gold broke a multi-year supporting trendline, and is not in the process of retesting this trendline from below. Second, notice the MACD divergence that has not yet fully resolved. Third, notice that in every other major rally prior to latest one, volume expanded heavily on the upswings. This time, volume is absolutely meager, which indicates that buyers are not nearly as confident as they were in the previous rallies.


Next, take a look at the COT data for Gold. The chart above shows gold’s price in the upper panel, and the 78-week COT commercial trader’s index in the lower panel. When the blue line is at 0, commercial traders are more short than they have been in the past 78 weeks, and vice versa for when the line is near 100. With the recent rally, commercial traders have taken the opportunity to drastically increase their short positions, which is a bearish sign.

Finally, I want to comment on sentiment. Seasonally speaking, August and September are quite bullish for gold. However, because this tendency has been so apparent in the past couple years, there is now a general consensus that gold will continue to rally in the coming weeks and months. Combining this bullish sentiment with the bearish factors mentioned above tells me that the probability of a drop is higher than the probability of a rally, and I am positioning myself accordingly. Good luck!

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