Gold: A Bubble Brewing?

By Brad Zigler

Real-time Monetary Inflation (last 12 months): 4.1%

There's a pattern developing in the December COMEX gold chart that should gladden the hearts of bullish technicians. The Christmas contract's advance has been recently stalled around the $1,060 level, leaving a price history best described as a wedge: daily highs getting lower and lows getting higher.

This pattern typically presages a breakout move. Given gold's fundamentals and prevailing trend, that breakout is most likely to be to the upside, perhaps with a near-term objective of $1,088.

The gold market's recent action reflects the tug-and-pull of jockeying market participants. Last week, money managers took some profits off the table from the long side, while commercials and swap dealers built record-breaking short positions.

COMEX/NYMEX Gold (Dec. '09)

Money managers really set the gold market's pace. Right now, they're taking a breather, tipping some technical indicators downward. MACD has turned bearish, RSI's weakened, stochastics point south and the last couple of volume spikes have been on down days.

Gold's intermediate-term prospects haven't changed really - the break from a lengthy consolidation period still points to an objective above $1,400 for the December contract - but there's some history to consider.

Managed money's commitment to gold has reached record levels. On a scale of 0 to 100, based upon funds' net positions, managers, in fact, have been topping out over the past month.

Look back a couple of years, though, between fall 2007 and spring 2008, fund-runners kept themselves heavily committed (averaging 94 to 96 on our scale) to gold before prices broke into a $300-an-ounce free fall.

Money Managers' Gold Commitments

So, is gold poised for a major downside break now? Well, no, not really. Sooner or later, though, a breather is going to stretch out into a break. Considering the recent heights attained by the yellow metal and the pileup of assets on the long side, that break's likely to be even bigger than last year's.

Better to be forewarned of that so an exit strategy can be realistically planned, don't you think? Options, anyone?

Comments

[Charles Maley:]

I’m wondering if Gold is even set to go up right this min…from what this post makes you think about..<A href="viewpointsofacommodity.../">Food For Thought- Gold trading</A>

Oct 26 03:25 PM

[Charles Maley:]

I’m wondering if Gold is even set to go up right this min…from what this post makes you think about..viewpointsofacommodity.../

Oct 26 03:28 PM

[Tom Szabo:]

The best option is to have been invested earlier this year so as to be in a position to have taken profits recently and to have cash on the sidelines for when there is a pullback, which is going to take place sooner than later. The only "options" I would consider are cheap December puts in COMEX gold and silver or November puts on sector leaders like AEM, GG, FCX, PCU, TCK. Some of these are fantastically priced (or at least were earlier today) at what might be the cusp of a vigorous correction. You don't need a lot of them to provide some timely protection -- a really good strategy would be to immediately convert any gains on put options into share positions. I'm also personally planning to go long COMEX gold futures against any option positions that go far enough into the money, creating a powerful slingshot scenario should a gold correction be sharp but very short, which is typically what happens this time of year.

Oct 26 06:30 PM

[Slvrizgold:]

Fiat currencies and Treasuries = BUBBLES POPPING!

Oct 26 09:44 PM

[BullnBear:]

The U.S. dollar and how this is handled politically should be a good indicator of where to be positioned with respect to Gold going forward. It’s tough to follow at times but should be well worth the effort in the end.

Oct 27 12:33 AM

[Donald Ingram:]

The record short positions held by the relatively few players of the bullion banks is key, in their effort to cap the price of gold and keep the price from breaking out. They are having a difficult time of it because of the Chinese position of buying any dips.
Think of size - the US has 9 cities with a population of 1 million or more, China has 160 cities of this size! With the average Chinese citizen encouraged by their government to buy and hold gold, this has essentially put a solid floor under gold at these current prices. The bullion banks will fail in their attempts to keep the price low. When this happens, and it will, just a matter of time, the price of gold will make it's major move higher.

Oct 27 07:58 AM

[SW Richmond:]

December deliveries could prove problematic if there is no 'correction', so the likelihood of a correction is IMO high. Look at Dec '09 OI figures:

www.nymex.com/gol_fut_...

Oct 27 08:04 AM

[Brad Zigler:]

SW Richmond --

What should, in your opinion, be gleaned from the open interest figures?

There are historically "active" delivery months in the gold futures markets -- February, April, June, October and December -- in which volume and open interest concentrate.

To discourage weak hands, the clearinghouse gooses spot month (currently October) margin requirements significantly higher than those of back-month deliveries, which drives out speculators and leaves the front month mostly to commercials.

Serial expirations (such as November) are only added when regular cycle deliveries go off the board. Open interest and volume in these months, therefore, never has the opportunity to build to the extent of regular cycle deiveries.

December is traditionally the most active delivery for gold, so an experienced gold futures wouldn't be surprised to see open interest and volume in that month comparatively high.

On Oct 27 08:04 AM SW Richmond wrote:

> December deliveries could prove problematic if there is no 'correction',
> so the likelihood of a correction is IMO high. Look at Dec '09 OI
> figures:
>
> www.nymex.com/gol_fut_...

Oct 27 09:56 AM

[Brad Zigler:]

SW Richmond --

What should, in your opinion, be gleaned from the open interest figures?

There are historically "active" delivery months in the gold futures markets -- February, April, June, October and December -- in which volume and open interest concentrate.

To discourage weak hands, the clearinghouse gooses spot month (currently October) margin requirements significantly higher than those of back-month deliveries, which drives out speculators and leaves the front month mostly to commercials.

Serial expirations (such as November) are only added when regular cycle deliveries go off the board. Open interest and volume in these months, therefore, never has the opportunity to build to the extent of regular cycle deliveries

December is traditionally the most active delivery for gold, so an experienced gold futures wouldn't be surprised to see open interest and volume in that month comparatively high.

On Oct 27 08:04 AM SW Richmond wrote:

> December deliveries could prove problematic if there is no 'correction',
> so the likelihood of a correction is IMO high. Look at Dec '09 OI
> figures:
>
> www.nymex.com/gol_fut_...

Oct 27 09:57 AM

[Brad Zigler:]

In actuality, the largest net short position in the gold market is held by commercials -- producers and users of the metals. Currently, their net short position is 70% above its three-year mean.

Swap-dealing banks' net short position is roughly HALF the size of the commercial accounts.

As the article points out, money managers are the pace setters in the gold market. Collectively, CTAs and other fund runners make up the largest single trading block in the gold futures market now. Their positions, in fact, are more highly concentrated than the commercials or the swap dealers.

About 70% of the exposure held by commercial gold traders is short; for swap dealers, shorts account for 83% of futures exposure.

Money managers tip much more heavily to the long side; fully 99% of their exposure is long.


On Oct 27 07:58 AM Donald Ingram wrote:

> The record short positions held by the relatively few players of
> the bullion banks is key, in their effort to cap the price of gold
> and keep the price from breaking out. They are having a difficult
> time of it because of the Chinese position of buying any dips.<br/>Think
> of size - the US has 9 cities with a population of 1 million or more,
> China has 160 cities of this size! With the average Chinese citizen
> encouraged by their government to buy and hold gold, this has essentially
> put a solid floor under gold at these current prices. The bullion
> banks will fail in their attempts to keep the price low. When this
> happens, and it will, just a matter of time, the price of gold will
> make it's major move higher.

Oct 27 10:24 AM

[Spartacuss:]

In short (pardon the pun) hang in there. Obviously, any market has it's up's and down's. I think too, that we could be in a holding pattern for a while, but not a long while as the wizards in Washington and at the Fed will soon signal that the liquidity wash will continue unabated. I say that because they have to. Public debt service now will one of the major obstacles that will prevent the Fed from raising rates. I think though that a head fake by the Fed is in store consisting of language mostly that they are taking steps to shore up the dollar and all should have confidence.

Once that phase is over we will have a new level of need for further liquidity probably sooner than anyone thinks and as the dollar fails to seriously rally, gold will continue it's climb, it is a sure thing.

Oct 27 03:01 PM