Gold COT DATA Over Or Undervalued?
Kristen Lush - www.TheGoldSector.com
May 22nd, 2006
I'd like to begin our analysis of the Gold market by first looking at the Commitment Of Traders data from the report released on May 22, 2006.
The red line represents the recent activity of the commercial hedgers. The Commercials remain neutral to bearish on the Gold market, with the current report showing a slight increase in their overall net position. The blue line represents the activity of the small speculators. They tend to be a good contrarian indicator and were heavily long leading into the correction. The current report has their net position long, but slightly less bullish then in the recent and previous weeks. Call them neutral to bullish. Finally, the black line represents open interest. High readings of open interest tend to indicate tend exhaustion while low readings tend to precede strong moves. OI in this market showed a sharp decline with the speculators getting out, and the Hedgers picking up the contracts. This is the beginning stages of a bullish set up, but we're not their yet. Always remember, this data is more for analytical purposes as the timing aspect can often have long lead times.
Valuation
The next couple of charts show two technical measures of valuation for the Gold market.
This is a longer term measure of valuation that defines value in terms of Gold's relative strength to the US Dollar and to Bonds. Since Gold has been in a strong uptrend, overvalued readings don't always produce corrections, but undervalued readings can be used to signal strong up moves and as a way fine tune a buy signal. Both of these models show that Gold is on the overvalued side. The best strategy for now is to wait for the indicator to show an undervalued reading, and then look for buy signals.
On to the Charts -
Gold Weekly
Gold Daily
First we have the weekly chart of Gold for a longer term perspective. We are using a 14 period RSI to help with momentum and trend analysis, along with a 9 period SMA and 45 period EMA to smooth volatility. First, note that the price has advanced in a parabolic rate of ascent. Such a move is unsustainable and we would expect a correction like the one we are presently witnessing. Also notable is the fact that both the moving averages on price and on the RSI are positive, so we should not conclude that the uptrend is finished. The daily chart looks similar to the weekly with the only exception to note is that the overbought/oversold oscillator (3 period SMA of the StochRSI) is showing an oversold market, which has led to some profitable buy signals recently. With the exception of the late April/early May oversold reading, the others have come at a more normal RSI levels around 50, so this one should be suspect as this market was due for a healthy correction.
Conclusion
Based on the data in the Commitment of Traders report, and on the current technical conditions in the Gold market, it would be advisable to wait out the current correction in Gold, until a more favorable risk/reward scenario develops. The trend remains up so we want to look for buy signals. Also it appears that the inverse relationship between the US Dollar and the Gold market is beginning to reestablish itself after a year long disconnect. We'll be watching the dollar for signals and insights in the metals.
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