HOUSTON (ResourceInvestor.com) -- An expected pullback for gold showed up this week, but may have run head long into a wall of support. (Emphasis on the word “may.”) The lack of a telltale spike up in the LCNS prior to the pullback for the metal bolsters that view.
Outlook Snapshot: October 22, 2005. (Caution flags remain flying, but some encouraging signs emerge for longs.)
The still near-record high LCNS precludes any bullish call, but the indicators this report follows closely have improved over the last week. Judging by the COT and technical signal “tea leaves” caution flags remain flying, but the odds may be shifting back in favor of the bulls. Confirmation (or not) of the Friday attempt at support in the $460 range is the key development to watch for in the coming week.
Please see largely expanded commentary and outlook below.
This Week’s Observations: Friday, 10-21-05
COT Changes. As of the Tuesday cutoff date for the commitments of traders report (COT), the Large Commercials (LCs) had reduced their combined net short positions (LCNS) for the week by 13,207 contracts to total 199,507 contracts net short while gold metal gave up $4.39. That’s an about-average rate of change (ROC). Both the LCNS and the total open interest eased off their respective record highs.
Last week’s report speculated that a reason for the low ROC in the increase to the LCNS might have been that a “practical near-maximum open interest which precludes a large ROC from forming” might be in play. In poker terms, with the open interest at an all-time high, the LCs and the Specs were close to “all-in.” Apparently we now have some evidence to support that theory as an expected pullback got underway without a telltale spike in the LCNS ROC showing first.
In a possibly important development, since last Tuesday (10/11), the open interest on the near-active December contract plunged a whopping 36,090 contracts from 312,041 to 275,951, with about 20,000 of that drop coming on Wednesday and Thursday of this week alone. In other words, about 20K of that drop occurred after the COT cutoff date. That may be suggesting a long liquidation spike occurred as spot gold dipped as low as $460.03 Thursday, nearly $20 off the 10/11 peak. Kind of like a threatening volcano releasing steam instead of doing a Mount St. Helens-style blowup.
If so, this is the kind of action one would expect in a typically sharp but brief bull market pullback as opposed to the start of a full-blown correction. Unfortunately we can’t see daily commitments of traders, so we cannot know for certain how much of that open interest plunge reduced the LCNS. However, historically, large drops in the open interest during strong dips for the metal often correspond with a high ROC for the LCNS.
If spot gold stays within a couple bucks of the Friday close of $466.90 by the Tuesday COT cutoff next week, we can expect both the LCNS and the open interest to be reduced substantially from the 10/18 COT report. We’ll know next Friday about that. Meanwhile we can speculate what it might mean if instead of an LCNS spike to the upside (higher LC short positions) we may have just witnessed the opposite without gold even challenging its implied technical support. That would be a bullish development and cause uncertainty for some already underwater short positions.
Gold Charts. Last week’s report concluded, “Momentum has paused as the chart works off the overbought condition turning it neutral to bearish very short term. While the odds favor a further pullback, the primary key to next week’s action will be where support forms, assuming it does of course.”
Sure enough, as expected, gold lost ground most of the week under the combined weight of a record high LCNS and COMEX open interest following a steep 6-week romp higher. On Friday the pullback checked up sharply late-day, making a bid for support forming at the $460 and change area. Should this attempt at support confirm early next week it would be a technically bullish development short term as both the daily chart and the weekly chart have moved out of overbought territory. If this turns out to be a second test of the 9/16 breakout from above (which holds) it would be about $2 higher than the first test, which would embolden the bulls.
According to several market reports strong physical demand asserted itself late Thursday and early Friday hinting that this pullback is running out of steam already. We’ll see.
