Gold Correction Finished or Not?
For the past eight weeks, gold looks like it has been working off an overbought condition by correcting sideways. Bullish sentiment levels have moderated somewhat without a significant drop in price, exactly what you would expect from a bull market correction, and we believe we are now in a bull market.
Gold Correction Finished or Not?
For the past eight weeks, gold looks like it has been working off an overbought condition by correcting sideways. Bullish sentiment levels have moderated somewhat without a significant drop in price, exactly what you would expect from a bull market correction, and we believe we are now in a bull market. At the same time, there are signs suggesting short term caution. Perhaps the correction has just begun?
First, let's look at the bullish factors. Number one is sentiment. On Friday, MarketVane's bullish consensus fell 4 points to 51% and the Daily Sentiment Indicator fell 7 points to just 48%. These readings are nowhere near the areas normally associated with tops. Sentiment has been moving sideways to down for weeks. On February 12, 2016, MarketVane's bullish consensus was 49% and the DSI was 88% while gold closed at $1240. The current gold market does not look like a peak in bullish sentiment.
Second, after closing below its 50 day moving average ($1233) last Thursday, gold reversed on Friday to close just above the 50 dma. In Friday's session, there was an early successful effort to push the metal to new lows for the week as it was smacked down to $1228. However, when these new lows didn't generate a wave of fresh selling, the metal rebounded, quickly recovering above the 50 dma. This is bullish action, in our view.
Third, the gold stocks have significantly outperformed gold itself, another typically bullish indicator. Last Friday, the GDX gold mining ETF retested Thursday's low and then rallied for the remainder of the session to close just off the best levels of the day with a gain of nearly 3 percent while gold finished with a gain of 0.53%. Last Friday's closing level for the US$ gold price was $12 lower than its closing level on 11th February, but in the same period we have seen a 21% increase in GDX and a 35% increase in the more speculative GDXJ (an ETF of junior gold stocks). Once again bullish action, in our view.
Now for the negatives. The main one is that the speculative long position on COMEX has grown rapidly. Despite the sideways action in the gold price, there has been no liquidation by Large Speculators. The February 12, 2016 Commitments of Traders report showed these speculators held a gross speculative long position of 201,754 contracts. As of April 15, this position had grown by 42% to 286,341 contracts. Despite this buying, the gold price has stalled. The offsetting Commercial gross short position increased from 226,280 contracts to 353,968, up 56% over the same period. These positions are somewhat stretched by historical standards but not unprecedented in a bull market. Can the gold price continue to go higher in the short term without the typical periodic liquidation by Large Speculators?
The second issue is the performance of other markets. In recent weeks, the US dollar has weakened significantly but gold has not responded with new highs for the move. The stock market has rallied mare than 14% since the market low of February 11, 2016, one of the sharpest increases in such a short period of time in decades. Bonds have also risen during the same period. It is unusual for gold not to correct during periods of strong performance by financial assets.
The recent performance of gold and gold stocks leaves little doubt in our minds that we are in a new bull market with major moves to come and many months to go. In the short-term, however, the direction seems to us to be uncertain.