The price action in gold has been undeniably impressive; a massive advance to begin the year, followed by a consolidation (multi-week pennant), and then a powerful breakout above $1250 last week targeting a move above $1300:
With the exception of Friday’s huge volume spinning top reversal candlestick the technical picture for gold is beautiful. However, there are growing signs of speculative froth that continue to give me pause regarding the sustainability of this upside move:
- Net speculative length in gold futures is now totaling nearly $22 billion (largest net long position since the January 2015 peak) with small specs (‘dumb money’) amassing a relatively impressive ~$2.5 billion net long position:
- A huge increase in GLD assets under management in recent weeks which means that there is a great deal of retail money participating in the rally:
- The gold miners bullish percent index (a measure of overbought/oversold) is at the same level it peaked at in September 2012 following the Fed’s “QE 3” announcement:
My final takeaway is that gold’s price action tells me that some large players are betting on additional “extraordinary” global central bank easing actions to be announced in the near future. The risk is strongly in favor of these announcements being “sell the news” events. Directionally I am neutral on gold over the near term, however, I see volatility remaining elevated for some time to come.