Gold Short Covering Rally Looks to Me Like It Will Continue

Click on Chart to Enlarge

The chart here is of GLD etf and shows projections of a continued advance up from the recent lows.

Since the lows over the last week or so, the rally in gold has been notably larger than any counter trend advance going back to the April highs.  So by this measure, the rally has overbalanced previous moves in the leg down, and indicates by objective measures that a larger phase of upward market movement may occur.

I have drawn lines on 3 of the major short covering moves off of lows over the last 2 years, and then projected them up from this August's low.  And we see what looks like an 10%+ move as realistic coming off of the current low if it holds.

The sentiment at this year's lows was at a historically extreme level and would argue for the possibility of a major low occurring here.

The Commitment of Traders data showed that large speculators went net short at the recent bottom, which is very rare in gold historically.  It does not mean that the low is in, but would indicate the possibility of a historically large amount of speculative short interest to unwind which could fuel major legs up in months to come.

Other precious metals look to me to be in similar set-up, and so this complex I view as having explosive potential.  Just based on the moves over the last couple years, there may still be 3:1 reward to risk using a stop below this month's low, if the rally were to continue and reach gains similar to the amounts of previous rallies in recent years.


Pete