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:
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?