Nothing’s going to stop gold, but for how long?

Last week, we wrote that the stronger than expected growth of Chinese industrial production would be positive for industrial metals, but probably negative for US Treasury yields and thus, also for gold. While industrial metals gained indeed, gold did not correct. Quite the opposite, it reached a new historical high.

At the beginning of the week, US Treasury paper climbed higher and yields declined as there were talks the Fed would buy more Treasury notes and bonds than holdings were maturing. Thus, the market priced in more quantitative easing by the Fed. The rise of the 10yr US T-Note future explains well the increasing price of gold at the beginning of the week.

However, as also US economic data came in better than expected during the week and US Treasuries pared their gains made earlier, gold did decouple and reached new record highs on Thursday and Friday. One explanation given by market commentators in the media was a weaker US dollar. However, this argument is not very convincing. Japan intervened in the foreign exchange market to weaken the yen against the US dollar. Thus US dollar index also moved sideways during the week, thus, it also does not explain the further rise of gold after US Treasury paper declined again.

The holdings of the biggest gold ETF, the SPDR Gold Trust, do not provide a clear picture. On balance, the holdings rose by 8 tones to 1,300 tones. However, after a rise on Tuesday, holdings declined again significantly on Wednesday. Only on Friday, the holdings at SPDR Gold Trust rose again. While gold closed higher on four days, the stocks at the biggest ETF increased only on two days and declined also on two days. This is not a strong indication.

Large speculators increased again their net long position in COMEX gold futures in the week ending September 14. According to the latest CFTC “commitment of traders” report, they have added on balance 4,564 contracts. Thus, their net long position at 244,261 contracts is again close to the high recorded at the end of June. As gold continued its advance, hedge funds and CFTs have probably added to their net long positions during the remainder of last week. Also the small speculators have increased their net long position slightly.

After reaching a new record high, analysts have revised their forecasts for gold higher. Many market pundits are now expecting a rise to 1,300 or even 1,400$/oz by the end of this year. These bullish forecasts might have triggered further gold buying. However, the market reaction was not very strong. If a market is really in a bullish mode, breaking out above a previous high should lead to a significant push higher. But gold made a strong daily advance to reach a new record high on Tuesday. In this case, it is not uncommon that a market digests the rise first before continuing the rally. And gold made new daily highs, which is also a positive sign. The technical indicators are also bullish. Thus, the chances are still good for a continuation of the rally and more days with new record highs.

Nevertheless, there is still one warning signal. Spot gold closed above the upper Bollinger band line, which is bullish as long as the closing price remains above this line. However, a close again inside the band is a negative signal, pointing at least to a consolidation or even the start of a correction. On Friday, spot gold closed inside the Bollinger band again. In addition, gold had formed a reversal chart pattern.

All in all, we are still convinced that the economic fundamentals do not argue for being long in gold. We fully agree with George Soros that gold is the next big bubble. However, the market is in a bullish trend since the end of July. This trend could continue. The technical warning signals are just a warning but not a sell signal yet. Thus, as long as no sell signal is triggered, going short gold is probably a dangerous game.