Gold Sentiment Update: Open Horizons Await

An update on gold as it attempts to keep up with its now suddenly more popular cousin, silver.

Previous commentary on the gold market was relatively positive with an outlook that expected higher prices which would be record prices as well. My last comment was a bit more cautious last month because gold sentiment was proving to be shifting quickly to the bullish side:

I don’t think a major top is here – at least we don’t have any real evidence of that yet. But we do have accumulating data that suggests that before continuing its rally, gold will need to rest here for a bit. A 10% move is not bad and for those that rode it higher, banking some of that coin would be a good idea.

That was accurate as gold rested by going sideways for the month of March. Recently, it has broken to the upside once again and we are seeing record prices for the precious metal.

Once again, gold sentiment is strangely cool to such a move. Usually we’d expect a market undergoing such consistent breakouts and rallies, both in the short term and in the long term to gather an ever increasing crowd of fans. That doesn’t seem to be happening with gold.

Various gold sentiment metrics that I monitor are relatively lukewarm right now (considering its breakout highs). From a contrarian perspective, that is a positive development. With such small fanfare we can expect the long term gold bull market to continue yet.

One specific measure of public interest in gold is the asset levels in the Rydex Precious Metals fund. Even as the NAV of the mutual fund focused on the precious metals equity sector breaks out along with the underlying commodity, retail traders are totally apathetic.

As you can see from the chart, the normal behavior pattern of these retail traders is to buy into the fund with increasing intensity as it does well. The strange thing is that they are totally ignoring gold’s new breakout this time. I’ve never seen Rydex traders eschew a new high in gold like this.

We also have to consider that from a technical view, there is almost no overhead resistance whatsoever holding gold back. That is to say, almost every single trader, whether short or long term oriented in the gold market is making money. And so, they have very little reason to sell aggressively.

It would seem that an open horizon greets gold, inviting even higher prices and new record highs. To balance that cheery scenario, I’ll highlight are two cautionary notes.

First, the latest Commitment of Traders report for gold shows a bit of excitement on the part of small futures traders with a net position of appx. 54,000 positions long. But the other participants (large speculators and commercials) are not leaning heavily against these smaller traders so it isn’t as intensely negative as it would be otherwise.

Second, the 20 day rate of change in the tonnage of gold held by the iShares Gold Trust NAV History (IAU) is now approaching overbought levels. As you can see in the chart below, when we see this relative measure reach such levels, it is usually a sign of excess that is followed by a correction:

The 40 day rate of change is also signaling extreme overbought (chart not shown).

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2 Responses to Gold Sentiment Update: Open Horizons Await

  1. DoctoRx says:

    It would appear that since the share price of this Rydex fund has been rising, shares owned have actually decreased since total dollars invested are stable. Speculators are selling into the rally. Is this your interpretation?

    • Babak says:

      Yes and no. It is almost impossible to isolate and extract net fund flows from the data we have because as you point out it is made up of the units as well as their value. But generally speaking, without getting into numerical precision, yes, we can say that since the value of the components in the fund have been rising and we are seeing the assets of the fund remain moribund that this means that there is some level of selling to offset a net rise.

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