Sentimental Warning for Gold

With gold having shown a nice bounce in the last couple of months from about 700 and now moving in the mid-800s, sentiment models now show that the advance may be overdone in the short run.

First, via Barrons, Mark Hulbert’s reading of gold timers showing excessive bullishness, which is contrarian bearish for bullion.

The Commitment of Traders data from the CFTC confirms the high level of risk for gold bulls. The chart below (click to enlarge) shows the net positions as a percentage of open interest of commercials, or hedgers, in gold. While readings are technically in the neutral zone, they are very near levels where a signal to go short is generated.
The chart of the net positions of large speculators, or hedge funds (click to enlarge), is mostly a mirror image of the chart of the hedgers’ positions and tells the same story of excessive bullishness, which is contrarian bearish for bullion:

The blogger COTs Timer is also cautious:

My trading setup for gold is in cash for the third week in a row. Large speculator net positioning has climbed gradually since it collapsed in August, when a bullish signal was triggered. It hasn't yet climbed to what my setup considers any kind of bullish extreme. But the other signal I use for this setup - based on the large speculator total open interest - has been on a bearish signal for the past four weeks. This is owing to a 31-percent increase in the large spec total open interest in the past month - typically a sign of downward pressure on the price of gold. So since the two signals don't agree, the overall setup is in cash.

In my past post Giving inflation a chance, I remain of the belief that inflation is destined to rear its head, which will be commodity bullish, but commodity prices are probably in a trading range for the next year or so and need to base before making a sustained advance.

In the short term, it looks like gold prices are facing stiff headwinds.

Addendum: Mebane Faber at World Beta has a blog entry about the XAU/Gold ratio being at a historic low. I refer readers to my previous post on the analysis of gold stock vs. gold ratio and why it might be out of whack, i.e. are production costs at gold companies rising?

Comments

[Conan the B...:]

Mr. Hui: One question, how do you reconcile Gold's move above $1000 with its inability to move above that level when OIL was approaching $150.

Oil inflation permeates all aspects of every economy but Gold did not follow suit. Gold has tried to rally in the face of the sort Financial turmoil that should have sent it skyrocketing in times gone by, but it languishes.

The dollar is rising, will gold rise too?

Jan 13 01:09 PM

[williemo:]

I agree with your premise., Also, looking at the historical relationship of gold price to oil helps perspective at this juncture. With the historic mean in the two commodities' prices over time being about 9 (gold to oil), the ratio is at an extreme right now at about 20. If so, either oil better go up 50%-100% ($60 - $80) in the next 3 months, or gold will need to come down to earth a little......maybe some of both. Regardless of all the reasons why gold will be the currency and metal of choice in the years ahead, it may not be the right time just now. We have a tsunami of deflation hitting us that is larger than any current demand for the future hard currency of choice. If the longer term relationship of the two commodities came into line, ie, 10:1, gold may just come all the way down to $650 or so.

Another historical perspecive that helped me was another fine author had found what gold prices did in the great depression. They fell dramatically for 2 yrs, and then ramped up geometrically for the next 2 yrs. or so. History is no guarantee, but it can be a guide. I'm in no rush to buy gold at $800 right now, and am more open to shorting the gold stocks that have doubled in the past 2 months. Good work !!

Jan 13 05:25 PM

[lark:]

Mr. Hui: One question, how do you reconcile Gold's move above $1000 with its inability to move above that level when OIL was approaching $150. (hedge fund, speculators, TTP, WS greed etc)

And the inability to move down 800 when oil is approaching 35 dollars.

Gold will rise as other currencies must fail in the same direction as the US dollar (trillion of dollars dumped) . When people will doubt about fiat currency. Eventually Gold is money.

Jan 13 08:45 PM

[Conan the B...:]

Lark: Gold will be at $700 or lower before the end of January.

My personal Technical prediction. I expect your song will be much the same. I also expect I'll be reamed for this prediction but when I hear your song, it will be happily received since I've been pushing the USD and DZZ over and over onto the blind.

At that point, after a pointless rally, I'll double up on my DZZ holdings and watch it tank another $100.

I do not know if $600 will hold or even $500, I do know that China is facing a recession and the GCC has lowered its own GDP targets. Without the Chinese, India and the Gulf States to support Gold, where will the buying come from? Russia? Give me a break.

So come on, dish it out. Oh, and BTW, be sure to read Howard Ruff's latest commentary on the coming US Depression.

Jan 14 04:07 AM

[User 337066:]

The people will throw their silver into the streets, and their gold will be like trash. Their silver and gold will not save them from the LORD's anger. It will not satisfy their hunger or fill their stomachs, because it caused them to fall into sin.20 They were proud of their beautiful jewelry and used it to make their idols and their evil statues, which I hate. So I will turn their wealth into trash.21 I will give it to foreigners as loot from war and to the most evil people in the world as treasure, and they will dishonor it.22 I will also turn away from the people of Israel, and they will dishonor my treasured place. Then robbers will enter and dishonor it. Ezekiel 7:19-23

Jan 14 09:02 AM

[auto44:]

Owning gold and silver does not make a person or a society evil. Other behaviors however may. There is also nothing evil about trying to prepare for our future and the future of our children.Thanks for your warning I am sure that you have our best intrest at heart.


On Jan 14 09:02 AM User 337066 wrote:

> The people will throw their silver into the streets, and their gold
> will be like trash. Their silver and gold will not save them from
> the LORD's anger. It will not satisfy their hunger or fill their
> stomachs, because it caused them to fall into sin.20 They were proud
> of their beautiful jewelry and used it to make their idols and their
> evil statues, which I hate. So I will turn their wealth into trash.21
> I will give it to foreigners as loot from war and to the most evil
> people in the world as treasure, and they will dishonor it.22 I will
> also turn away from the people of Israel, and they will dishonor
> my treasured place. Then robbers will enter and dishonor it. Ezekiel
> 7:19-23

Jan 14 11:17 AM

[auto44:]

My guess is you probably got banned for you language and other behavior and not for your opinion. I'd like to hear your opinion weather I agree with it or not, as I have found that I can learn nothing from folks who 100% agree with me, Ah but when someone disagrees it makes me think and sometime I find out that I am wrong. Please keep contributing ,but I for one can catch your drift without the expletives.


On Jan 14 09:19 AM User 30121 wrote:

> mark mchugh: WARNING! Be careful what you say to paultaut! I just
> got reinstated because I told the #$%^&* he's nuts! And got banned
> from the site. Now I must, and will, behave. Maybe, he's a plant
> to get the posters' feathers ruffled, I don't know. Now, I just pass
> over his posts. Like I do with CLH's.
>
> Read the good ones! LIKE YOURS!
>
> Er, NICE ARTICLE, HUI!

Jan 14 11:25 AM

[Conan the B...:]

User30121: SeekingAlpha has a Section called Terms of Use which spells out exactly what is proper conduct on the site.

The TOU includes but is not limited to personal abuse.

Agreement or disagreement with a comment is entirely up to the individual.

How you state your disagreement, however, should be civil. IMHO

Jan 14 11:36 AM

[Conan the B...:]

Mark: I read the Article, Cautious not bearish was what I got out of it. I am bearish. I wanted to know his opinion on the USD vs gold.

Auto44: I have always felt that getting lucid comments on one's opinions did not have to involve yelling( the use of Caps), swearing or personal abuse. I also had believed that those doing so were allowed to do so.

The way it turns out: If we allow this sort of conduct to continue, it will. I will no longer "turn the other cheek".

Personally, I like what User 30121 has to say most of the time. I just don't believe the rhetoric he uses to get a point across is relevent to the Point itself.

Jan 14 12:12 PM