Last month I reviewed the state of gold and argued that while gold sentiment was rising along with price, the technical picture was giving us an all clear for continued price appreciation. Another strong bullish argument I mentioned was that we were about to embark on a historically strong gold seasonality, starting in late August. For more, see the previous commentary here: Gold’s Positive Seasonality Counters Growing Optimism.
At the time of writing, gold was trading at ~$1230. Today it closed at $1278, after hitting a high of $1283. It broke above previous resistance at $1250 momentarily in early September and then again much more decisively last Tuesday. While technically this is an all time record high for the price of gold, if we adjust for inflation, it is still far from the highs it reached in the late 1970's and early 1980's. Using the CPI deflator, the current price of gold is only ~$454 per ounce. For a chart, see today's Morning Notes. Gold would have to reach $2435 before it is the equivalent amount as its previous decades old high.
While gold sentiment is elevated, it is still not at an extreme. For example Market Vane's gold sentiment is 71%. As we'd expect, this has tracked the rise in the price of gold during the past few weeks but it is still far below the 90% extreme that we last saw in May 2006 and December 2009. Interestingly enough, Market Vane's gold sentiment has actually declined slightly while gold has rallied - it started the month of September at 74%.
According to the Daily Sentiment Index, sentiment towards gold is high as it is with many commodities: Corn 96%, Sugar 98%, Oats 96%, Silver 93%, Swiss Franc 95% (usually correlates highly with gold due to massive Swiss Bank reserves). It isn't surprising to see silver regarded so highly since it recently also broke out at $21. The last time it traded at that level was at its previous top in March 2008.
Commitment of Traders reports from the CFTC are also showing a large long position from small and large speculators. The most recent data (for September 14th) shows 87% of the large speculators and 77% of small speculators as long. Such lopsided long positions are also the case for other commodities like Corn, Wheat, Cattle, and Cotton.
One area where sentiment is still muted is the Rydex market timing traders. According to the asset level of the Rydex Precious Metals mutual fund, Rydex traders are very reluctant to jump on the bandwagon of higher gold prices. While the NAV of the fund has increased in the past few weeks, money has only trickled into the fund. Part of that could be that the fund is not as high beta as these fast moving traders would like and part of it is that there isn't really any excitement towards precious metals:
Gold Fund Flows
Finally, the largest gold ETF, the SPDR Gold Trust (GLD) added another 6 metric tons of the precious metal as money flowed into the exchange traded fund. This brings total holdings to approximately 1300 metric tons, within a hair of the previous record high in late June 2010 of 1320 metric tons. Of course, this was just before gold fell from $1250 to a low of $1160 in August.
The CBOE gold volatility index is scraping the bottom of the barrel at 17.92 with a recent low last week of 16.69. As with the better known S&P 500 Volatility Index (VIX), when the gold volatility index is so low, we usually are close to a top, not a bottom.
As with a few weeks ago, we have a positive technical picture. Even as gold has broken out, it is still relatively close to its long term moving average (see first chart above). This along with continued positive seasonality may continue to propel gold forward. At some point, sentiment will reach a crescendo, as it always does. If that combines with the end of the positive seasonality for gold (mid October) then it will be a major negative. As well, you have to keep in mind that almost all commodities are enjoying an extremely bullish sentiment environment right now. So when the positive seasonality ends in a few weeks, gold could be tarnished with the same brush as the rest of the commodity complex.
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