Gold Spot Price - What are the Institutions Doing?
Kristen Lush - www.TheGoldSector.com
May 30th, 2006
In our last Gold Spot Price update, patience was recommended as the gold data we presented indicated that the gold spot price was experiencing a healthy correction while the overall trend remained up. Let's take a look at where the gold spot price stands now.
Commitment of Traders Report (Sentiment):
Chart 1 shows the current positions of the gold spot price Commercial hedgers, the small speculators, and open interest. This data is from the most recent COT report that was issued on May 26th. The data has been indexed to a range of 0 to 100 so that we can quantify the sentiment of the various groups. The red line represents the activity of the commercials. Note the strong increase in their long activity over the past week. This means that the "smart money" thinks that Gold is cheap at these levels and has increased activity on the long side. While we would like to see the activity higher, somewhere over the 80 level, this is still a bullish development that should be noted. The black line represents the outstanding open interest in this market. Low levels often set up timely buy signals and it is currently at the lowest level of the last 6 months. This is another bullish development. The blue line is of the small speculators for the gold spot price. They tend to give contrarian signals. Their current position is net long, but not excessively bullish. No significant developments to note about their activity.
Valuation Analysis:
Chart 2 shows a technical measure of gold's valuation when compared to the U.S. Dollar. The current reading shows that the gold spot price remains fairly valued, but it is getting closer to producing an undervalued reading. When a market is in an uptrend and gets undervalued, that is the best time to take buy signals. As the market gets closer to resuming its uptrend, we would ideally like to see the indicator fall into undervalued territory, but we don't always get everything we would like to see.
Chart Analysis:
Chart 3 is a weekly chart of the gold spot price. It shows that the moving averages on both price and RSI are positive, with price finding support last week at its 9 day simple moving average. If this support holds then we should move on to test the highs around 715.
Looking at the daily chart, we see the RSI is currently in the well test 50 - 40 zone. This area has served as support on 3 previous occasions. In up trends, a market will usually become oversold in the 40 region. The market has also been bouncing off of its 45 day exponential average, indicating this level might serve as support before we head higher. The blue trend line is one that conservative traders might want to use to enter or re-enter the market. More aggressive traders can buy gold when the market moves above its 9 day average or take a MACD buy signal. You could also take a crossing of the averages on RSI as a buy signal. The black line is drawn at the $620.50 level and represents some longer term support if the market decides to correct further.
Summary
The COT and valuation measures indicate that we will need to be more patient if we want an ideal set up before we enter the market on the long side of gold again, but the current indications are very bullish. The weekly gold spot price chart continues to show that the uptrend is intact. The daily chart shows a trend that is "sideways to up." The RSI may have found an important support level and the market remains oversold. We can begin to look for buy signals to time our entry into gold on the long side.
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