Before going further it is worth highlighting the fact that gold is now one of the most hated asset classes in the world, and Big Money’s media henchmen are not wasting any opportunity to put the boot into it, oblivious to the irony that such negativity is music to the ears of the true contrarian, which we like to think includes us. The relentless and brutal attacks on gold in the mainstream media are a sure sign that we are at or near to an important bottom.

Returning to consideration of the 9-month chart we see that gold has dropped back quite hard, but in a fairly steady manner, over the past week or so towards its April panic lows. This alone implies that there is a fair chance that the support at these lows will hold, or that if it is breached, it won’t be by much. As we will soon see, COTs and sentiment indicators strongly suggest that gold is now in a basing process, and that if it does drop further, it won’t be by much.

While gold admittedly doesn’t look too good on its 8-year chart, as the high volume breakdown from the top area implies that it could drop further towards strong support approaching $1000, this outcome does not look likely given the COT and sentiment extremes that we are already seeing, and the explosion of negativity towards the metal in the mainstream media, all of which are indicating that we are at or close to a major bottom NOW.

It thus looks likely that gold will turn higher from, or near to, the supporting long-term uptrend line shown on its 20-year chart below.

Having reviewed the gold price charts let’s now consider its latest COT and sentiment charts, starting with the COTs.

The COT chart below shows that Commercial short and Large Spec long positions have dropped to their lowest level by far for the life of this chart. This is bullish. Small Specs are out completely, which is another positive sign.

The COT chart below, which goes back to 2006, reveals that Commercial short and Large Spec long positions are at their lowest levels since the 2008 crash. Small Spec long positions have collapsed to almost nothing. This is all very bullish for gold over a medium and long-term time horizon.

Chart courtesy of www.sentimentrader.com

Hulbert Gold Sentiment is at its lowest reading for years. This is a contrarian indicator that is strongly bullish.

Chart courtesy of www.sentimentrader.com

The Public Opinion chart for gold below shows that bullishness towards gold is at its lowest level for years, which is another contrarian bullish indication.

Chart courtesy of www.sentimentrader.com

The Rydex Fund traders, who are renowned for their incompetence, also furnish us with still more proof that gold is at or close to a major low, as the chart for their holdings below shows their Precious Metals assets at a very low level.

Chart courtesy of www.sentimentrader.com

One reason for gold going into the dumpster over the past week or so has been the strength in the dollar. As we can see on the latest 6-month chart for the dollar below, it has broken out upside from its recent Dome formation and gone on a tear, but it is now overbought.

We had expected this upside breakout from the Dome so it came as no surprise, and last week interpreted this move on the site as being a 2nd impulse wave. However, judging from the latest COTs and sentiment for the dollar, we may be being too generous in this interpretation, as indicators suggest that it is getting close to, or may even be at, a top.

The dollar’s latest COT chart shows that the Commercials now have a substantial short position, and the Large Specs a substantial long position in the dollar, while the Small Specs are record long the dollar, for recent years anyway, and this is viewed as a fairly sure sign that we are at, or close to, a top.

Chart courtesy of www.sentimentrader.com

Meanwhile Public Opinion on the dollar is close to its normal upside limit, also making it highly likely that the dollar will top out soon.

Chart courtesy of www.sentimentrader.com

Needless to say, if the dollar tops out shortly, gold and silver are likely to take off higher again, and now we are a good point for them to do so.

Now, we are aware that if the parabolic acceleration in the broad market intensifies short-term, gold could remain depressed and perhaps drop some more, and this fits with gold’s seasonals. The seasonal chart below shows that gold is seasonally weak in May and June, but starts to perk up in July before entering its seasonally strongest time of the year in August and September. So the base building process in gold may continue for a while yet, during which gold and gold ETFs may be accumulated on weakness.

While gold and silver are thought to be in a bottoming out process, the same cannot yet be said for PM stocks, which are still in freefall, and likely to drop further if gold and silver continue to base for a while, perhaps dropping a little more in the process. On its 8-month chart we can see that the HUI index still looks terrible despite its recent huge losses. Having broken down from a large Head-and-Shoulders top this index plunged and the minimum measuring requirement for the pattern calls for a drop to the 210 area, and it is considered quite likely that in the final stage of the decline it could plunge quickly back to the vicinity of the 2008 lows in the 150 area, where, depending on how things look at the time, it may be in order to aggressively, but selectively, buy the sector. The terrible appearance of this chart, and the lack of any basing action to date has deterred us from buying the sector in recent weeks, despite it obviously being oversold and relatively cheap.

The following stunning chart from www.sentimentrader.com shows that Small Speculators are more than completely out of the Precious Metals sector – they are shorting it for the first time ever. While this does not mean that it won’t drop further over the short to medium-term, it certainly puts us on notice to look out for the final bottom soon.

Chart courtesy of www.sentimentrader.com

How far might the parabolic blowoff move in the broad stockmarket run before it burns out? A generally useful guide is that it is likely to top out when the S&P500 index runs as far ahead of its 50-day moving average as its 50-day moving average is ahead of the 200-day moving average. If this is what happens it clearly has some way to go yet before it peaks. If it does this we will be ready.

As we can see from the following, which relates to the broad US stockmarket, the fools are certainly getting worked up at this time, while Smart Money is scaling back its holdings…

Chart courtesy of www.sentimentrader.com

The conclusion of this article is set out in the opening paragraph, which will surely be appreciated by the true contrarians amongst you.

We will shortly be examining the broad US stock market on the site in some detail, with reference to various technical indicators, in an article which will be simply and succinctly titled “FOOLS!!!!”

-- Posted Monday, 20 May 2013 | Digg This Article