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Gold and the Bull Trap

 -- Published: Monday, 16 January 2017 | Print  | Disqus 

By Thomas Furman

In recent days I have seen an increase of gold-positive articles finding their way onto my computer screen.  Writers from Motley Fools to Bloomberg are all touting goldís inevitable rise.  I have read these articles and noted all of the same, familiar toneÖthis time itís different and gold will continue to rise from here so buy quickly or you will miss outÖto the moon I suppose.  Yes, I believe gold will one day take out $2000.00 mark but not today, not tomorrow, and not this year.  Before the gold bugs start crying and demand an old fashion lynching please here me out.

A Dose of Skepticism

From the start of this current rally Iíve been a little skeptical.  Note the daily chart was forming a falling right triangle, a bearish formation, before moving higher.  This same formation occurred in October before moving higher and that ultimately reversed after the presidential election.  (By the way gold was going to sell off regardless who was elected.  The price action on November 9th clear demonstrates the huge selling/shorting was well planned.  If someone thinks it was a knee-jerk reactions to the election outcome theyíre naive. No one sells short billions of dollars on a whim when gold was moving so violently higher in aftermarket trading.)  To believe the current price action is a meaningful move higher I would have preferred to see a longer consolidation in the $1120 Ė $1140 area.  Ideally, a move to the mid-$1170s, reversing, and retesting the lows around $1125 before moving higher would have been a much stronger signal the low was in.  At this point Iím convinced we will have a reversal but itís more likely the Shorts will be done covering and proverbial rug will be pulled from underneath the few remaining gold bulls and price will fall through $1120.  A break of $1120 will signal the short-term support is broken and the Shorts will pile in and drive the price to the $1080 area before taking a break and consolidating.

Snap Shot of XAUUSD

In the chart below note where gold is trading in relation to the 50 DMA.  In the last two trading sessions it has bounced off the 50 DMA twice and since late August the 50 DMA has been acting as resistance.  Note the Stochastic is in the overbought area (above 80) and has is developed a slight divergence with price over the last few trading days.  Further note overall volume has started to drop off indicating buyers are exhausting.  From the start of the recent run the volume was huge but the price movement was relatively small.  All of those liquidated short positions caused the massive volume (see COTS report).  The question is who is left to one.  For clues let's take a look at GLD.

Whoís Buying GLD?

Note the lack of GLD buying; total shares outstanding have gone from 278.1 million shares on December 23rd, the start of the current correction, to 272.6 million as of January 13th (a 2.2% decline).  One would expect to see an increased in the number of shares if the price was indeed a result buying interest and not physical gold short covering.  Also note the same share trend occurred from October 17th, start of a correction, to November 2nd, the correction high (not withstanding November 9th high.  The market was already in a down trend).  GLD shares went from 326.0 million shares to 318.6 million (a 2.3% decline).  In contrast the direction of GLDís share count outstanding from January 4th to March 3rd of 2016 was up from 215.8 million shares to 266.7 million ( a 23.5% increase).  Regardless of what others are writing the recent share decline in GLD is not a good sign as it demonstrates there is no buying, rather continued liquidation. 

The Wrap

I believe what we are seeing in price movement is simply a bull trap.  A repetitive trap to ensure as many investors as possible are gathered on one side before the slaughter.  I suspect over the next few trading sessions gold will struggle at the 50 DMA before finally giving up and plunging.  The gold bulls might be successful at overtaking the 50 DMA but even that will be short lived.  To change my outlook I would have to see gold take out $1215 area, retest the 50 DMA, and move higher but I donít believe that is likely not withstanding a major world event.  In that case all bets are off.  Good luck trading and donít be fodder for the market!


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