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Gold prices have been in a downtrend for almost five years now, falling from an all-time high of $1,923.70 in September 2011 to below $1,050 an ounce in December 2015. However, a rally in the last few weeks has the precious metal facing resistance, and if it can break through it will end the downtrend.
On the daily chart, we see that gold has rallied over 9% from the December low. Because the rally has been so sharp, the daily oscillators are in overbought territory, which is something that has happened regularly in the past year.
The weekly chart is where we see the resistance that I referenced before. It comes via the 52-week moving average. We see that the trend line has come in to play on several occasions over the last couple of years, with the price exceeding the moving average on a few occasions. But the last couple of encounters with this resistance have been futile.
The weekly oscillators aren’t in overbought territory yet, but they seem to be headed there with the current rally. The last time both the 10-week RSI and the weekly stochastic readings were in overbought territory at the same time was back in March 2014.
Turning our attention to the sentiment toward gold, let’s look at the Commitments of Traders report. When it comes to commodities, the COT report is the best way of knowing whether investors are bullish or bearish. The COT report comes out every Friday and it shows the collective holdings of three groups: large speculators, small speculators and commercial hedgers. I prefer to look at the large speculators, because these are hedge funds and other professional money managers with the capital to move a market.
The COT report for gold is unique in that large speculators never really have a net short position. In fact, my resources allow me to go back to 2007, and large speculators have not had a net short position on gold in all that time. There have only been three occasions when the group was holding less than 50,000 contracts net long: mid-2013, late 2013 and the last few months.
The report showed for the first week of December showed less than 10,000 contracts being held net long. That’s the least bullish the group has been going back to 2007. The sentiment has shifted in recent weeks and the group is now net long almost 60,000 contracts.
What the sentiment and charts suggest to me is that gold may see a little pullback as it faces the resistance of its 52-week moving average, but if large speculators continue to shift their stance, gold should break through the resistance.
Thanks to the ease of ETFs it is much easier to benefit from a move in gold now. I would look to buy the SPDR Gold Shares (NYSEArca: GLD) if gold closes the week above its 52-week moving average.
The GLD is currently trading around $110.50. I can see it moving up to the $13o level in the next year. Given the volatility in equities, that would be a very nice return.
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