Gold made its low for the year on June 28 at $1179.40 per ounce (all prices based the futures contracts). In the next month it bounced back almost $170.00 or about 15%. Since then it has fallen back, then recovered again.
But the bounce did not change the longer-term direction, which is down, and yesterday the futures failed to regain the previous high and closed at $1333.50, well below the peak of the bounce.
So is the bounce running out of steam? Is it time to go short again? Absolutely not! In fact if you are short gold now, it is time to think about exiting the position. Start with the chart.
Gold may be performing a classic two-leg bounce, an A-B-C-D retracement. This pattern is often symmetrical, and the two legs are often roughly equal in length. That would give a final target around $1450, and an intermediate target of about $1380, once the existing resistance around $1328 is overcome. Not a time to short.
OTHER CONSIDERATIONS
The chart doesn’t tell the whole story. According to the CFTC Commitment of Traders data, the short interest in gold is extremely high, but beginning to fall rapidly. Gold shorts covered more than 23,500 futures contracts last week, much higher than normal.
The short trade is overcrowded, and some of the smart money is smelling a short squeeze coming. When the shorts are squeezed the price goes up, because sellers become buyers when they have to cover their positions.
DEMAND FOR PHYSICAL GOLD RISING
In addition, the demand for physical gold – as opposed to “paper” gold represented by futures contracts – is climbing rapidly, especially in China and India. To cite just one example, physical gold delivered to buyers by the Shanghai Gold Exchange so far this year totals 1,249 metric tons; the total for the entire year 2012 was 1139 tons and annual world-wide gold production is about 1520 tons. At the current rate, the Shanghai exchange will take it all.
In light of this soaring demand for physical gold, traders have been watching JP Morgan, a leading precious metals dealer, with suspicion. Three times in the past two weeks JP Morgan has ‘borrowed’ gold from other dealers, HSBC and ScotiaMacotta.
Why? No one outside the company knows. But some speculate that JPM needed to borrow physical gold to meet demands for delivery. And that makes traders nervous.
Take it all together, and it doesn’t quite make a case for going long. We’d like to see the price move past the resistance at $1328 first. But it is a pretty convincing argument to stay away from the short trade in gold. Don’t put new shorts on, and consider exiting existing short positions.
