A Little More About Gold

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The chart above is a screenshot from Sentimentrader.com showing the last few years of Commitment of Traders data for gold. The top pane is gold prices. The next one down is commercials which tend to be smart money. The 2 panes below that are large and small speculators respectively. We see that the smart money is the most net short on the chart. Also, the speculators have both recently gotten the most net long on the chart. So the dumber traders are buying gold and the smarter traders are selling gold to the most extreme degree.

While gold can continue higher, from an investment standpoint, I think people need to stay away from purchasing now. Getting in the habit of either buying into selling panics (during bear markets) or on substantial pullbacks in bull markets is a much better idea. Also, I have seen reported on the blogosphere that the DSI (daily sentiment index) survey got up to 97% bulls yesterday. Again, when everyone is a bull, who's left to be another bull? It just screams caution on buying gold right now regardless of anyone's view of the long-term picture.

Now with that said.....whenever a commodity or stock breaks out to new all time highs, it has the potential to make major advances. To understand the psychology of it, realize that when an asset is at its highest point ever, there are no buyers who bought at higher levels and now want to sell. So there is no real impetus to sell other than belief that it is overvalued. Also, when short interest starts to rise as price advances, every new high will create pressure on the newly instituted shorts to buy back which adds further buying pressure. I checked the short interest on the GLD ETF and it has been increasing over the last month or so on this break to new highs. Because of that I think gold may have some more room to move up. And also there is really no technical divergence now. When trying to sell into an asset at all time highs, I think it is much better to wait for a major divergence to appear.

So technically gold looks strong but is overbought. From a sentiment perspective, it looks excessively bullish. For anything other than very short term trades, I would just watch and wait before making any trading moves on gold.

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This chart show the ratio of the Gold Bugs Index to gold prices. It has been common at tops to see the gold stocks start to weaken on a relative basis and create a type of divergence as gold prices continue higher. That has been occurring over the last 2 months. So this would also warn that gold prices may be hitting significant highs before a substantial correction.