Gold Sentiment Update: Approaching Extremes

As the price of gold ticks higher, sentiment measures are becoming strained under the burden of investor bullishness for the precious metal. We already observed the extreme level for the DSI last week. This week I wanted to share with you the Sentix gold Overconfidence Regret Analysis (ORA).

This is a simple 13 week oscillator which keeps count of how many consecutive positive streaks there are in gold. Right now it is approaching the “ceiling” and close to indicating a pause or correction:

Source: Sentix

The Commitment of Traders report for gold is also showing a growing interest and participation by traders. The 10 week rate of change in the total open interest in the gold futures market has indicated major tops in gold quite accurately in the past. Right now it is close to doing so again:

Source: McClellan Financial

Having said that, here are a few positive technical and sentiment observations:

Distance from Trend
Because gold has been rising so persistently for the past +10 years in almost all time frames, all of its major trend lines, whether short, medium or long term, are in an uptrend. Within that context, the current gold rally has not yet pushed prices away from their moving average to such an extreme point that we’d expect a retracement. To develop that scenario gold would have rally much more sharply that it has in the past few months.

Rydex Traders
As I pointed out in a previous commentary on gold, these market timing traders are surprisingly dormant during the current gold rally. They have not invested any serious amount of money in the Rydex Precious Metals fund in contrast to all other major rallies that we’ve seen. If we continue to interpret this measure of sentiment as always, then this can be seen as a positive development. Some of this may be explained by the underwhelming performance of gold equities compared to the underlying commodity. To see a chart, follow previous link.

Sentix Medium-term Sentiment
Similar the lukewarm condition of Rydex traders, the medium term sentix sentiment measure for gold is surprisingly benign right now:

Source: Sentix

Closed End Fund premium/discount
Various gold and precious metals closed-end funds that trade at variance from their NAV are not showing a significant amount of premium right now. This would suggest that retail traders are not excited enough to bid up the price of these funds in order to have exposure to gold.

Silver is most definitely the precious metal at much higher risk of serious correction compared to gold. At this point, I see gold bull continuing to push higher but at a slower pace. As well, any correction or implosion in the price of silver would undoubtedly spill over into gold so it is a real threat that must be noted.

We are seeing several important signs of growing bullish sentiment in gold. However, the price of gold has not yet reached an exhaustion point that would provide a definitive signal for an important top, while there are indications that this is in development. Two points to watch are an accelerating gain in price which would provide a short term parabolic rally, pushing price away from trend as well as luring in even more traders and ultimately exhausting the bullish camp; and the repercussions of serious correction in silver (which is in an unsustainable parabolic pattern).

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