Let’s start our usual weekly update of the Commitments of Traders data by looking at the intermediate term chart of gold.

The market tacked on about $4 to end this week but was unable to clear technically and psychologically important round number chart resistance at $1300. It did briefly penetrate that key level but failed to extend higher, attracting selling instead.

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As you can see, that level remains the last barrier ahead of a run to $1340-$1350 for the metal. Above that and one can realistically begin to talk about a shot at $1400. Not until!

The downside seems intact for now near $1220. Below that is $1205 and then $1200.

Since gold broke out of its strongly defined downtrending price channel in early February it has held firmly above the upper trendline on any subsequent retracement lower in price. This is constructive.

Having said this, that topside barrier at $1307, made in January of last year, will need to be cleared for this chart to show a fledgling pattern of a series of higher highs. For now, what it is showing is gold having broken its downtrend but stuck in a sideways pattern below $1307-$1300. That speaks more to consolidation rather than strongly bullish price action.

The reason I bring this up is because of the composition of the COT this week. To put it bluntly, it has taken a tremendous amount of buying to push gold to these levels. Commercials and Swap Dealers are digging in and unless the large specs can take price safely through this strong resistance barrier, we could very well see some stale longs beginning to book some of those paper profits that they are sitting on and cashing in their chips. Bullish traders would not want to see any sort of downside technical levels give way, not with what is the largest hedge fund net long position since 2011!

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What is fascinating when looking at this chart is seeing the level of hedge fund net longs today and back then in 2011 while comparing the gold price at these comparable levels of long side exposure. In 2011, that price was above $1700. Today it is near $1300. Another way of saying this is that it has taken about the same amount of hedge fund buying to take the gold price to $1300 as it took to bring it to $1700 in 2011. That is obviously a bit oversimplified but it does speak to why any stalling in upside momentum now takes on additional significance for those who are bullish towards gold.

Here is another way of looking at this hedge fund setup.

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The total number of OUTRIGHT hedge fund long positions is a mere 1,000 contracts off of the all time high exposure they had back in August 2011. The notable difference is that the number of their outright short positions is larger compared to what they were holding back then.

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At the peak of their outright long position holdings in that month, they had a mere 5,044 short positions. That made them long by a ratio of 48.4:1!

This week, the number of outright short positions is almost 5 times that size making them long by a ratio of 10.57:1. That is rather significant. They are very strongly bullish gold, but not to the extent they were back in 2011 when a hedge fund could scarcely be found with a bearish inclination towards the metal. This fact alone tends to take a bit of the sting out of what would otherwise be quite an unnervingly lopsided long exposure.

What about the other side of this equation; namely the big shorts?

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As you can see, they have been quite willing to sell all the gold that the hedge funds want to buy from them. As a matter of fact, the Swap Dealers now have their largest NET SHORT position on record. Frankly, I begin to get interested whenever I see this category of traders positioned very heavily on the long or short side of any of the two precious metals markets. They have a very good track record at these extremes.

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What this means is that traders should be alert to any slowdown in upside momentum. It DOES NOT MEAN TO BLINDLY start selling gold. It means to be ALERT for POSSIBLE DOWNSIDE as long liquidation is now a very serious threat in the gold market.

I do believe that we would need to see some significant move higher in the US Dollar from current levels to begin this process. Whether we get that or not is unclear. If we are to go solely off of today’s paltry payrolls increase, chances of that are low. However, we cannot categorically rule out a Fed rate hike at some point this year. That will ultimately, if and when it occurs, take the Dollar higher and force an examination of the sentiment towards gold currently being held by these large speculators.

Just as a side reference, here is a look at the positioning of the big players in gold in percentage terms:

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Notice that the COMBINED OUTRIGHT LONG POSITIONS of the large specs is well above the all-time high. The Combined OUTRIGHT SHORT POSITIONS of the Commercials and Swap Dealers however remains significantly lower than their previous peak back in 2011. They can get shorter yet!

Lastly, here are some charts showing total open interest and comparing it to the gold price as well as the total open interest compared to the number of spread positions.

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