We have a first confirmation of a bull market in gold, and, as said, June appeared to be a turning point in gold.
Gold’s price action is spectacular. On the daily chart, we now see a new pattern arising, and new resistance areas come into play. By far the most important observation on gold’s chart is the trendline which connects gold’s all-time highs with the 2012 highs (pink line). That trendline suggests that $1,450 is the next secular resistance point. That happens to coincide with a strong resistance area (see in pink on below’s chart) which is the highest resistance area after gold’s collapse in 2013. Do not underestimate the stopping power of this resistance point ($1,450) and area ($1390 – $1480).
Although gold’s price action is spectacular, we observe that the precious metals complex shows extreme readings, which is not a healthy state. If anything the exceptional rise of gold miners, doubling since February of this year, brought miners at a mega resistance area (indicated in red on below chart). This really suggests that the upside potential is limited at this point, certainly short term.
Furthermore, and by far our biggest concern, the Commitment of Traders report shows how extreme the positions of traders have become. As said repeatedly, an extreme level of commercial net short positions, which were acquired at a higher than average pace, is very bearish. The red annotation on below’s chart makes our point. The chart goes back 9 years. Never before have we seen such a fast accumulation of commercial net short positions. Moreover, current net commercial short positions are the highest ever. We hate to say this, and it may sound very counter-intuitive at a time when everyone seems to be all-in gold, but this is a very bearish setup. The COT report is not a timing indicator, but it gives a general indication of the upside potential, which is limited at this point.
CONCLUSION: While gold’s price action is spectacular, its chart shows heavy resistance is near. Similarly, gold miners have reached mega-resistance, and the COT report is extremely bearish. Based on this, we believe the upside in gold is limited, which conflicts with our finding that gold entered a new bull market this week.
Our interpretation is that investors should be very prudent at current price levels, and that the behavior of the coming correction should tell a lot about the long term potential of this new bull market.
If gold manages to clear $1,450, we believe we will be in a 1979-scenario.
This article is brought to you courtesy of Taki Tsaklanos.