Over the past few weeks Gold has traded at or near record highs. It has yet to embark on a sustained breakout but that is not because Gold (NYSE:GLD) is a crowded trade. In recent months money has moved into equities, Oil (NYSE:USO) and Silver (NYSE:SLV). As a result, some hot money and speculative money has moved out of Gold, leaving the market in a healthier state.
The chart below from timingcharts.com shows the price, commercial short position and open interest. A high commercial short position typically coincides with a top in the market. Note that the commercial short position totalled 302K contracts at the very end of September. At the January low, the commercials were short less than 200K contracts. As of last Tuesday, the figure stood at 258K contracts which is well below the recent high of 302K contracts. Open interest has declined from 650K contracts in November to 509K contracts as of last Tuesday.
Sentimentrader.com’s public opinion gauge shows 69% bulls. Interestingly, since late 2008, public opinion has remained in a range from 60% to 73% bulls. Note that major peaks in 2006 and 2008 came near 85% bulls. If and when public opinion exceeds 75% bulls, then we’ll have an indication that some speculation is coming into the market.
Sentiment by itself is not a timing tool unless it shows major extremes in either direction. Looking at sentiment data helps us decipher the near-term potential of a market. This data for Gold tells us that the market is in a healthy position. Speculation in the futures market and speculation by the public are at reasonable if not even lower levels. This tells us that the market is in a position to rise in the near term (with an increase in speculation) and that the potential downside is somewhat limited.
Jordan Roy-Byrne, CMT
Another great read: Gold & Silver Premium Vastly Outperforms with 86.5% Return in 2010>>