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At the start of the month we looked at several reasons why gold’s recent correction was over. When both technical and sentiment indicators align as they did, we usually see a high probability setup.
Since I wrote that analysis gold has steadily climbed higher, from $1185 to $1232. To be fair, gold bottomed out a few days before, in late July. Conceding that I missed the exact low, the call was a good one and continues to be. But if you were long gold for this recovery, there are a few reasons you might want to start looking for good areas to lighten up those positions.
The Rydex Precious Metal fund has been slowly recovering from the massive exodus it suffered last month. Both price and net assets bottomed at $63 and $102 million (respectively) in late July and have since then climbed steadily but slowly. But as you can see from the chart below, based on net assets, there is still no real speculative fervor for gold from Rydex traders.
Another positive factor was the Hulbert newsletter sentiment for gold. Like the Rydex data, the Hulbert Gold Newsletter Sentiment index has also recovered from its low in late July. From a low of 9.2%, it has jumped almost 36% points to 44.9%. This level of optimism is middle of the road for the HGNSI since we saw it climb to 68% in late 2009 as gold prices peaked in a parabolic blowoff.
While the above is mildly negative for gold, there is an important factor that may just tip the scales back for the bulls. We are about to enter within a few weeks, the strongest seasonal time for gold. I’m not sure why exactly but the end of August and the beginning of September marks the start of the most positive period for gold in the year. I’ve mentioned this before - for seasonality charts, see: Gold About to Get Seasonality Super Boost and Gold Seasonality Turns Positive.
The most logical explanation is the wedding season in India which begets torrential buy orders of physical gold. Whatever the reason, in the past 20 years, gold has had a positive month in September 80% of the time. That kind of an edge is not something you want to bet against. So while it is prudent to have one eye on the exit, gold could maintain its momentum and use the positive seasonality boost provided by September to break free from the $1250 resistance that has been pushing it back so many times before.
The obvious resistance level at $1250 is fast approaching. One possible scenario would be for gold to have a brief correction in the short term. If it is shallow but serves to shake off the gathering bullish sentiment, then we could set up for real breakout and see new highs.
From a technical point of view, this is realistic since gold is not overbought yet. The relative distance from its 200 day moving average shows that while gold has risen recently, it still has a lot of room to run. This is clearer still when we compare today’s technical picture with that of May 2010 or November 2009.
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