Pessimism surrounding gold is approaching extreme levels, suggesting it may be time to go long
With U.S. stocks and the dollar picking up strength over the long term, gold has been trending lower for years. The
SPDR Gold Trust ETF (GLD) is off 45% from its record peak of $185.85 in September 2011, last seen at $102.47. Things haven't gotten much better recently, with GLD already down 4% quarter-to-date -- and almost 10% on the year.
However, a trio of indicators, courtesy of Schaeffer's Quantitative Analyst Chris Prybal, suggest the precious metal could get a breather in the not-too-distant future. For one, the chart below shows that the 10-day moving average of GLD's 10-day put/call skew -- which includes strikes up to 5% out of the money -- has just rolled over from a recent high above 1.20. Looking back, previous such rollovers have corresponded with short-term price stability (and even rallies) in GLD --
most recently seen in October.
A second indicator worth noting is the positioning of large traders, as measured by the Commitment of Traders (COT) report and designated by the red line in the chart below. As you can see, these traders are approaching a net bearish position on gold after exiting previous long positions. Historically, this set-up has often correlated with short-term floors and subsequent bounces in gold.
Finally, as alluded to earlier, the greenback is strong. Recently, Goldman Sachs named the U.S. dollar its
top currency trade for 2016, recommending investors go long because it has "more room to appreciate versus the euro and yen." Echoing this, the chart below from
Financial Orbit indicates fund managers believe the dollar is an extremely crowded trade right now. A reversal in this extreme optimism would mean a decline in the currency, which should theoretically support dollar-denominated gold futures.
