You can more or less see the sentiment towards gold by looking at the upper solid dark blue line which dates back to 2006. It rises and falls along with the actual price of the metal. Can you see what direction that line has taken since late 2012 when gold was priced near $1765? It has been steadily declining with a few upward blips. That indicates the outflow of speculative money from gold which as we all well know by now, has been heading into equities in search of yield. Incidentally, you can see the same thing in the gold ETF, GLD, with the steady drawdown in the amount of metal in its holdings.
Now focus on the bottom red line which is a mirror opposite of the upper blue line. You can see that it bottomed out at the same time gold peaked near $1765 on the chart and has been relentlessly climbing higher. That is FRESH SHORT SELLING. Can you see how the hedge funds are building on the short side of the market? As a matter of fact, this is the largest outright short position of that category of traders on record!
Folks, I have to say something here at the risk of irritating some others in the gold community that I consider to be friends. Many keep pointing to this fact of a building speculative short position as a bullish development. It is not. It is bearish. Why? Because as I have stated ad infinitum over here, Speculators drive markets today, not commercials. As long as the specs are interested in selling gold, the market will struggle to overcome chart resistance levels and reverse to the upside. Yes, there is definitely the potential for some strong and sharp short covering whenever you see specs with a building short position, but it requires a CATALYST before that will occur. At some point we will indeed get such a catalyst (we got a preview of it this past week at the introduction of Bernanke's speech when he mentioned that a premature slowdown in QE would not be wise) but until we do, the trend is very obvious.
Let me just say that as a trader, not an investor, and please note this vital distinction, unless I have deep and unlimited pockets, for me to go against the flow of hedge fund money, is financial suicide. This crowd can run over commercial interests and send them crying to their mammas. How in the world are you or I as smaller traders going to be able to handle that sort of selling pressure? No, we have to be wise and only take a contrarian position if the technicals are telling us that it is time to do so. When those guys reverse course and begin covering, it will not come in a stealthy manner!
There is a tendency among some to keep saying over and over again: "this growing short position is wildly bullish". The implied notion among some advocating this (not all of them) is that you should jump in a take a long position in the futures because they just know that the market is going to suddenly reverse to the upside and you will miss the big move if you don't. Well, it may just do that. Then again, it may just not! What if it does not? Down it will go and down will go your trading account with it. Instead of buying on "HOPE" wait for the chart pattern to indicate that a turn is at hand. At least that way you can mitigate the risk somewhat because you will have a definite chart point at which you can tell whether or not the trade has gone wrong.
Again, I want to repeat, this is intended for those who are trading not those who are investing in gold or buying it to protect themselves from the debauchment of currencies which is occurring. The latter group buys gold for peace of mind and will methodically accumulate the metal as price moves down. That is a far cry from buying a LEVERAGED futures contract.
In summation - hedge funds here in the West are selling gold on rallies with strong quality buying emerging on trips back down towards $1360 and below. That buying is coming from the bullion banks and swap dealers in the paper markets. We all know how solid the demand is at those levels in the physical markets, especially in Asia. This looks to be the pattern until proven otherwise by the price action.