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The chances of gold breaking out
to new highs in the near future are rapidly diminishing as the heavy hitters
who have always prevailed up to this point are dramatically ramping up their
short positions. Our COT chart shows a big increase in Commercial short
positions just over the week up to last Tuesday to levels that in the past
have preceded major reactions in gold. While there is still a fair chance of
gold making a run at its highs over the short-term, there is considered to be
very little chance now of a breakout to new highs, and any such advance
towards the highs would likely be accompanied by a further ballooning of
Commercial short positions to an even more extreme level that would all but
guarantee a heavy reaction.
 
On the 6-month chart for gold we
can see that the steep uptrend from its early July lows stalled out last week
at a zone of resistance, with the uptrend being broken marginally late last
week, by virtue of the price moving sideways. While this is increasing
downside risk, especially given the aforementioned ominous COT structure,
there remains a fair to good chance that it will break higher and run at the
highs. Should it do so, watch what happens to Commercial short positions - if
they balloon still further as we would expect, then it will make sense to
reverse positions in gold and larger gold from long to short. Should gold
break lower immediately, which would be signaled by a sharp down day, it will
be a signal to lighten long positions.
There is currently a disparity
between the COT structure for gold which is increasingly bearish, and that
for silver which is considerably more positive. This is explained by the fact
that silver is much more of an industrial metal, that does better when the
stockmarket is rising. In itself the fact that the Commercial short position
in silver is not ramping up suggests that silver could advance further and
that the stockmarket rally still has legs.
The relatively shallow downtrend
in the dollar of the past couple of weeks has brought it to an important
support level at its early June lows. While it is being pressured from above
by its falling 50-day moving average and MAY break sharply lower as a result,
the magnitude of support in this area coupled with the now substantial gap
between its 50 and 200-day moving averages suggest a probable intermediate
reversal, which would of course be expected to coincide with a reversal to
the downside in gold and silver.
Pulling all of the above together
we can arrive at the following conclusions: the risk of a reversal to the
downside by the broad stockmarket and gold, silver and PM stocks has
increased significantly in recent days. Despite this there is scope for them
all to break higher and stage another upleg. Should this occur, however, the
likelihood of a much more severe reaction developing later will increase
dramatically, particularly as we move towards the Fall months. This will be
especially true for the PM sector if the Commercial short position in gold
continues to expand.
Clive Maund
Diploma Technical Analysis
support@clivemaund.com
www.clivemaund.com
All articles by Clive Maund
Trading the precious metals and Energy
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