What’s happening with gold right now is unprecedented. In fact, I had to go back nearly 25 years to find any precedent to what we’re seeing in gold today. Let’s take a look what is happening if you are currently investing in gold and silver.

Before I get to exactly what I’m seeing that is literally off the charts, let me give you a quick overview of where things stand in terms of the big picture.

As you all know by now, after keeping us out of gold for the past 3 years, our SSI system triggered an Entry signal for gold earlier this year after gold confirmed its upside potential by going nearly vertical through January and February. The SSI Trend is now solidly up.

I’ve been expecting a pullback in gold for weeks now, in part because of the massive overhead volume shown in the volume-at-price (VAP) chart on GLD below.

Huge numbers of shares changed hands in GLD between 118 and 120. That makes this price range important psychologically because so many market participants are focused on these levels. Lots of people are likely thinking of the $120 level on GLD as their “I’ll get out when it gets back to breakeven” level. (Present company excluded of course!)

The other big reason I’ve been expecting a pause and a pullback in the gold rally gets me back to the beginning of my story today. It’s what I’ve been seeing in the sentiment data.

For weeks now I’ve been pointing to how the commercial interests in the gold futures market are selling their gold forward at a record setting pace. That trend has only gotten stronger. In fact, we haven’t seen this pace of selling by the gold producers for nearly 25 years.

The following chart tells the current story. The top section of the chart shows the cash price of gold. The middle section of the chart shows how the gold producers (commercial interests in the gold futures markets) are now short nearly 300,000 futures contracts. The bottom chart shows how many futures contracts are open currently. It’s called “open interest.”

What exactly am I seeing in the above chart?
  • Commercial interests (Commercial COT) are selling faster than they have at any time on the chart. They are hungry for cash and are concerned that they may not be able to sell at these prices again soon.
  • The open interest in gold is increasing dramatically. There is a LOT more interest and participation in this rally.
  • Price has continued to rise even as the commercials have sold.

In summary, gold producers are selling their gold forward as fast as they possibly can, but demand is still outstripping supply and, therefore, prices are still holding up. In the longer term, this is super-bullish for gold. In the short-term, however, I continue to be concerned.

In times like this, I always like to look back and see what happened in similar situations from the past. I had to dig deep to find any similar situations from the past. These kinds of extreme movements don’t occur very often. Here’s what I found.

Gold 1993

I had to go all the way back to 1993 to find a similar situation for gold where we have the same three conditions that we’re seeing in gold today. Take a look:

I was able to find more recent examples of this confluence of indications in a few other commodities. Here are examples from platinum, oil and palladium.

Platinum 2012

West Texas Crude Oil 2011

Palladium 2013

Again, in all of these cases, what we’re looking for are sharp rises in price, sharp selling by the commercial producers (Commercial CoT) and sharp rises in the number of players involved in the futures markets (Open Interest).

In all of the cases I was able to uncover, we saw at least a short-term sharp pullback in price after such extremes of sentiment and open interest.

Gold has defied gravity thus far, but don’t be surprised if you see it start to come back down to earth soon. Long term I’m bullish. I just think that gold bulls are due for a good scare before prices move higher again.

Have a great weekend,