Strange Action in Gold

Last couple of months I'm closely watching action in gold. It doesn't stop amazing me. Below is a chart of streetTRACKS Gold Shares ETF (GLD).



(Click on picture to enlarge it).

GLD today crossed down its 13-day moving average. Usually it's a short term bearish signal. Add to that flat top on Feb 20 - Feb 23, another bearish sign. GLD might be a good short candidate, except for one little thing. Between Jan 23 and Feb 9 it formed an excellent head and shoulders pattern and also crossed down 13-day MA (marked on the chart). What did it do after that? Jumped right up. Means we already had perfect technical short case, and it was completely wrong call.

Now let's take look at fundamentals. Couple of known facts. First of all, India usually consumes about 30% of gold annually. But since last November, India sharply reduced gold imports and it didn't import any yet in February (data as of Feb 16). So we have buyer of 30% physical gold disappear from market and price is going up. The fact that future market volume exceeds volume of physical market by orders of magnitude is not surprising. But a little bit surprising is the fact that on NYMEX open interest of April contracts is almost five time bigger than that of June, which has second biggest open interest. It looks more like ETFs and other funds buying futures and rolling them over every month. Of course, it's hard to estimate the global future market, because NYMEX is not the biggest gold exchange.

Do we have a disconnect between physical and paper market of gold? If not, somebody came to market lately to take place of India. I can imagine only one country with money and possible desire to do that: China. But I didn't see any evidence that China is buying a lot of gold lately. If disconnect exists, then current price of gold is a function of pure paper market, caused by ETFs and other funds. In other words, a lot of hot money came to gold market lately.

It's very hard to predict behavior of hot money. That's why I'm very cautious about gold right now. If I'm going to enter short position, it's probably going to be GLD puts or something like that. And I'm not going to commit a lot of money to it. But chart looks tempting.


Full disclosure: at the time of publication author did not have any positions in GLD. Positions can change any time.