GOLD is looking increasingly bullish, and why shouldn’t it?
- Gold in yuan terms has bounced off its 200-day moving average and is testing prior highs.
- Bond yields and real rates are dumping to new lows.
- Stocks are in crash mode, increasing expectations for rate cuts and QE
- We have just broken downtrend resistance, a.k.a. the bull flag, at 1291 and are now seeing higher lows and higher highs.
So what is there to worry about? The same
old problem: the Commercials, i.e. the Bullion Banks, are loading up short again.
Since April 29, open interest has risen literally every day from 428k contracts to 521k contracts on Monday, an increase of 93k, or 22%, in just 10 days. One of, if not THE, fastest paces in history. And we know the bulk of that is because the Bullion Banks are loading up short.
The COT data on April 30 showed open interest at 430k and on May 7 at 450k, an increase of 20k. At the same time, the “SWAPS”, a.k.a. the Banks, increased their net short position from 37k to 48k, a gain of 11k. Given that open interest has risen another 71k since then while the price has broken resistance and moved a little higher, we can safely assume that the Banks have increased their net short position significantly also, perhaps as high as 87k if we use the same ratio to open interest for April 30 to May 7.
Every time the banks hit a peak in their net short position, Gold tends to fall. Based on prior peak short positions, 87k is more than sufficient for a peak in Gold.
At the same time, the Money Managers or “Funds” are likely adding to their net long position, which was still relatively small on May 7 at just 9k.
This does not necessarily mean that Gold peaks tomorrow. In fact, I wouldn’t be surprised if it continued a little higher to allow Funds to add more longs and Banks more shorts before the latter smash the price lower again. We’ve seen this time and again from the Bullion Banks. However, this time it may be for a more positive reason.
The Banks want to be long when the next rally in Gold takes place, as it plans to be a massive one to new highs, imho. At the same time, they will want to squeeze out as many weak longs as possible before that rally occurs. They can do both at the same time by driving the price down, and then when it takes on a momentum of its own to the downside, start taking profits on their shorts and adding long positions while the Funds add shorts. When the Banks are sufficiently long, then Gold takes off.
Simply put, even if Gold goes higher in the next few days or weeks, there is a high risk that the banks are getting ready to drive down the price of Gold soon, or at least try to. The purpose of this article is to be wary of this risk.
From my perspective, I am not averse to a deeper pullback in Gold. As I said in February, I am looking for new highs later this year to $1400 plus. A further move lower would provide the necessary energy to break significant resistance above at 1350 to 1380.
The following are ideal scenarios for that energy I am referring to, not forecasts:
- Daily RSI down to ~30 or below
- Daily MACD Line down to August levels around -15
- Spot DSI in the teens or lower
- 21-day moving average DSI in the twenties, maintaining the overall uptrend
- Funds are short, Banks are long
With these conditions in place, we would have the necessary energy to go up and take out the key resistance zone above, and finally hit higher highs.
So what price levels am I talking about for these conditions to be achieved?
If the banks do decide to force prices lower, based on prior episodes, they are going to want to take out at least the 200-day moving average at 1257 and likely the 200-week moving average at 1247 also. Once the stops have been cleared out below there, up we go, imho. There is a cluster of Fibonacci support levels between 1200 and 1223. I don’t see Gold going below there. That said, if it does go lower, unless we break 1167, I am only looking up to $1400 plus.
Note: I am bullish all timeframes except for the very short-term. I am looking for 1400 plus later this year thanks mainly to a stock market crash and an actual Fed reversal in policy to rate cuts and QE. Either we go lower first then higher, or straight up. I am just pointing out the risk that we go lower first based on the action I am seeing on the part of the Bullion Banks and the energy required to break resistance to new highs. This is going to happen either way, imho. The higher probability scenario for doing so is that we need to go lower first before higher.