Heavy Call Option activity in GLD

Dow Jones is reporting that some very large bets on a rise in the gold price from current levels are currently being made in the largest gold ETF, GLD.

Gold has dropped to within spitting distance of support near $1150 before rebounding higher as it was led up by Silver in today's session.

The catalyst seemed to come from the Consumer Sentiment number which was quite strong, surprisingly so. Under recent conditions, this sort of number would have been expected to generate strong selling across the precious metals sector as it further feeds the theory of tapering to begin earlier than expected.

What seems to have happened however is that when the wave of selling did not materialize, bottom pickers, as well as extremely profitable shorts, decided that was a signal to either book some profits or establish some new long positions.

Further complicating matters - it is not only the End-of-Month positioning and book squaring that is at work but also the even larger End-of-Quarter movements. Large investment funds and hedge funds will generally square their books especially after amassing such large profits on the drop in gold and gold shares over this past quarter. That generates another wave of buying.

I prefer to see what gold does next week as we start a new quarter to get a better read on whether or not we have established a lasting bottom. I still expect rallies to be sold in this market but from what level is a bit unclear. A second test of the overnight low down near $1180 would be most revealing as to whether the carnage in this market has finally come to an end.

The mining shares are quite strong today and continue to build on yesterday's mild gains. That is a good sign as they led this market lower and I believe will lead it higher when a permanent bottom is finally forged.

Take a look at this quarterly gold chart. This appears to be worst quarterly performance for gold in history!

If we ignore that spike high to $1900 and draw out Fibonacci retracement levels off the triple top at $1800, gold has bounced off the 38.2% Fibonacci retracement level of the entire move beginning back in 2001. That level is near $1200 (1207 to be exact). That is constructive but quite frankly, this market has been beaten up so badly that a bounce of some sort was way overdue. I prefer to err on the side of caution as gold is entering a seasonally slow period for demand with the summer doldrums coming up. That, plus the fact that we have a big June payrolls number coming up soon and if that thing comes in stronger than the markets expect, it is going to further feed the TAPER psychology.

Let's be clear - all the way down we have had bottom callers and none of them have been correct. Eventually they will get it right but as the old saying goes, even a stopped clock is right twice a day!  Let's monitor the subsequent price action for a while before getting too dogmatic. Remember the trend in gold is now down on the shorter term charts so specs will be looking to sell rallies unless something changes on the QE front or the psychology in the market changes to one of expecting a pickup in inflation.

There is no need to be a hero and try nailing an exact bottom. It is next to impossible to do that on a consistent basis. Traders do not need to call exact tops or exact bottoms for that matter. All they need to do is to spot the change in trend and position themselves to take 60-70% out of that trend to make money. Remember, Bottom pickers and Top pickers eventually become cotton pickers!