Gold closed last week above $1,000 an ounce, its highest ever weekly close. Yet who was reporting this fact in the Sunday papers?
I was reading The Telegraph, whose financial coverage is generally ahead of the curve compared to the other broadsheets. I was delighted to see that, far from being on the front pages, gold's milestone got barely a passing mention.
The fact is, the mainstream still don't get gold. The longer this continues (and long may it) the longer this bull market has to run.
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However, in the short term, a few indicators are telling us to be wary. Gold has a nasty habit of frustrating the impatient and it may just be about to do so again...
There's a lot of activity in the gold market right now
Every Friday, details of the commitments of traders on the Chicago futures exchange from the previous Tuesday are published. This enables all and sundry to see how the large funds and professional traders are positioned in the gold market. Each futures contract is worth 100 ounces of gold roughly $100,000. For every buyer you need a seller (or to put it another way, for every long you need a short).
Open interest (the total number of contracts open on gold, both short and long) currently stands at 451,000 contracts, or $45.1bn. That's a lot of money an unprecedented amount in fact, as we'll discuss in a moment. Basically, it shows that there's a lot of activity in the gold market right now.
You have to ask yourself, how much of that $45bn is actual money, and how much is leverage (debt). You also have to wonder, if new money is going to come into this market and push it higher (so that the open interest increases), where is that new money going to come from? One answer might be the central bank printing presses.
As well as being a lot of money, it's a lot of gold: 45.1 million ounces, or just over 1,400 tonnes. That's more than the official gold holdings of Japan, Russia, Switzerland, India, Spain and the UK (we have just 310 tonnes), according to numbers reported to the International Monetary Fund. If open Comex interest were a country, it would be one of the world's top ten holders of gold.
Looking at this figure another way, roughly 2,400 tonnes of gold were mined last year across the globe. So the current open interest on the Chicago futures exchange amounts to more than half of annual global production. If all those who have bought a contract held out for delivery of their metal which they won't those who had sold could have quite a problem finding the metal to deliver (bearing in mind that not all newly mined gold finds its way onto Comex).
Be warned: gold is due a correction
Despite the lack of reporting in the press, this open interest is unprecedented. It's never been so big. On the one hand that's something to get excited about, but on the other it is flashing a warning light. Often in the past when interest has neared these levels, it has presaged a major correction and the end of a run. So be warned.
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The good news is that there have been occasions when such interest has only resulted in minor corrections. One example is in October 2005, when gold was trading at around $470 an ounce. We got a slight correction, then gold launched itself beyond $700 by May 2006. The same happened in late 2008, when gold was $850. There was a correction of about $50, then gold moved over $1,000 by the following March.
Given that even during gold's major advances we often see a correction in October, and given that gold's summer low appears to have come early this year, at the start of July, it's not unreasonable to expect some kind of seasonal pullback over the coming weeks. That could easily knock us back to $960, or even below $900.
But for now we have a nice intermediate-term trend developing in gold, as the chart below shows, and we are making higher highs and higher lows with each step forward.
Is gold's next big upmove underway?
I have mentioned before gold's habit of consolidating for 18 months or so, then making a big move of six to nine months, where it moves up some 40-50%, before another period of consolidation. It is my belief that, even with a possible imminent correction, gold's next big upmove is now underway and by next spring we'll be somewhere near the $1,400 mark.
Much of this move in gold is a symptom of the falling dollar, but gold is also in a nice uptrend when measured in pounds, as you can see by the next chart.
I would like to see this all confirmed with a couple of weekly closes above the old high of $1,033. Until we do, there is the risk of a double top. The only person who would want that is Gordon Brown and anyone who is short on the Comex.
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