Market Report: Technicians turning bearish

The consolidation of June’s price rises for gold and silver continues.

Predictably, technical analysts are now talking prices down, expecting gold to test the 55-day moving average currently at $1280, and possibly the 200-day MA, which is at $1195. Last night (Thursday) gold closed at $1333 and silver at $19.80.

We shall see. There is no doubt that technically both metals are showing up as very overbought, and vulnerable to a significant correction. Furthermore, the Managed Money category on Comex shows record long positions, and is vulnerable to a shake-out. No wonder technical analysts have turned.

Truth to tell, they got it wrong on the way up, and only changed their minds when uptrends for gold and silver were firmly in place. They called a bottom, only after gold had risen 20% against the dollar, about 5% below current levels.

Last month, I drew readers’ attention to gold’s steady performance in yen. This has continued, as the next chart shows.

The price in yen is the green line. Admittedly, the gradual steady rise owes much to yen weakness on the foreign exchanges, but from the point of view of a Japanese resident the price trend is eye-catching, particularly given negative interest rates on Japanese government bonds. Furthermore, gold’s stability has been impressive, the price in yen being only down 4% from the September 2011 highs.

The Eurozone has negative interest rates as well, with an Italian banking crisis on the back burner. For a Eurozone resident, avoiding exposure to a shaky banking system can only be done investing deposits in government bonds, or alternatively physical gold. The gold option is certainly something Germans understand fairly well. The older generation in France and Italy does as well. So it is not hard to understand where new sources of demand are coming from.

I am also detecting growing interest in gold from investing institutions. They are less likely, perhaps, to think in terms of physical gold, but are interested in building a position in a portfolio context. It should be borne in mind that physical gold is not a regulated investment, but futures are regulated. Institutional interest is therefore likely to focus, initially at least, on the paper markets.

This brings us back to the relevance of the Managed Money category on Comex. The chart below shows how net longs have exploded to extraordinary levels in recent weeks.

Analysts would argue that speculative positions this extreme will end in tears. Normally, they would be right. But what if investing institutions, and not speculating hedge funds, are using futures to maintain a strategic non-speculative portfolio position in gold? If so, then we can expect a significant and continuing positive bias to net contracts in this category.

This opens the possibility that the bullion banks, which take the other side of Managed Money longs, could be forced to capitulate. They must be worried that open interest in both gold and silver is larger than in the past by substantial margins. It is no longer a market where persistent shorting and a bit of patience always wins out for them profitably.

It is a bold call, but it could be “Game On” for the bulls.

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