The situation is paradoxical – gold and silver have broken out upside despite already extreme COT readings, yet the dollar has still not broken down. This setup continues to warrant caution, yet if the dollar should break down from its potential top area and drop hard, gold and silver will go into a vertical meltup – and here we should not forget the tight physical supply situation. In the last update we expected gold and silver to drop due to the COTs extremes, but they have done the opposite resulting in even greater extremes, which in silver’s case are “off the scale”.
On gold’s 1-year chart we can see that after a two-month trading range, gold has at last broken out upside from it, and appears to be starting another upleg, although the large gap between the moving averages and the COT extremes give cause for concern. Momentum (MACD) has taken a sharp upward break from a low level and looks positive.
On the long-term Hedgers chart we can see that while even more extreme readings have been reached in the past, it is now approaching them, and on only one occasion during the period covered by this chart were such readings not followed by gold going into retreat, in 2005.
Chart courtesy of www.sentimentrader.com
Gold stocks continue very strong, and appear to be approaching the end of the current strong upleg, and it looks likely that that GDX will make it to about $27.50 before the current upleg is exhausted, but higher still if the dollar breaks down soon…
End of update.