Every trend we’d been following was working in gold’s favor, asserts sector specialist Brien Lundin, editor of Gold Newsletter.
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Those trends—including most immediately North Korea’s latest provocation—are still working to support gold, yet the metal has been retreating in the face of a bear attack in the paper gold market.
Gold’s decline from its recent highs has been pretty steep and consistent. As of this writing, it is at $1,321.60 bid on a spot basis.
On the equities side, the gold stocks aren’t down much, as call option buying in the GDX gold stock index has fired up considerably, indicating confidence from speculators that the current bear attack on the metals will fail.
In short, if gold stocks are a leading indicator for the metal (and they usually are), this is a positive development.
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On that bear attack, this is one of two factors that have been driving gold lower over the last two weeks. The large speculators (i.e., hedge funds) have been piling into paper gold, and as their long positions have built the large commercials have been lying in wait, ready to pounce.
As gold started accelerating to the upside in late August-early September, the large commercials began ramping up their short positions to stem the tide.
Still, enough new longs came in to make their efforts ineffective. Gold was able to shake off the attack, at least for awhile.
Over the last couple of weeks, however, speculators have grown somewhat inured to the repeated provocations from North Korea, and the barrage of shorting by the commercials has had a significant effect.
Gold’s rally stopped just short of the key level of $1,363, which marked the 2016 peak, and it’s probably no coincidence that this was the line in the sand that the commercials chose to defend.
Considering the heated buying in gold-stock options today, it seems as if the hedge funds are also looking at this key benchmark, and betting that gold will fend off the commercial attack and break through. If it does, look out.
On the downside, $1,300 remains firm support, and the bullish story won’t be closed out unless gold falls through $1,290.
The bottom line is that there’s a battle going on right now in the paper gold markets. I think the longs will emerge victorious next week, but that’s based on a gut feel only.
