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Gold: The Paris Hilton of Trading

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Maybe we need a breakout to get everyone on board!

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Gold is like the Paris Hilton of trading. People either love it or hate it, and there ain't many in between.

Because of that, it's fun (and often profitable) to watch those emotions swing to and fro as the yellow metal gyrates around its longer-term trends. Below we'll take a look at a few of those sentiment measures to see how traders have been reacting to the recent rise.



Click here to enlarge.


The first pane shows public opinion toward gold. That opinion figure is generated through a combination of around a half-dozen sentiment surveys which cover a fairly broad swatch of the gold-trading population. Each is then weighted according to their historical accuracy at calling turning points in the metal.

Like all the others, it is a contrary indicator – when folks get too optimistic, then we should expect gold to pull back; when emotion swings into the "too pessimistic" camp, then we should expect a rally.

Currently, we can see that opinion has swung above the upper trading band. That band is derived by looking at all other data over the past year and calculating how far a current reading would have to travel before it could be considered extreme. While opinion isn't at its most-bullish on an absolute basis, it is getting positive enough to cause a little worry.

The next pane shows the net large speculator position in gold futures. When these (mostly) trend-following funds get too invested, the metal tends to pull back, and vice-versa. As of last Tuesday, these guys were still holding one of their lowest net long positions of the past year, so no worries on that front.

The last pane shows assets in the Rydex Precious Metals Fund. This is more a measure of small-trader sentiment, and like the others can be useful at highlighting optimistic and pessimistic extremes. Here, too, we're seeing traders hesitant to fully embrace the recent rally, which should be a net positive for gold.

One caveat with this indicator is the introduction of the Streettracks Gold Trust (GLD), a readily-tradable fund which is likely sucking some assets away from Rydex, so we could see a secular decline in the Rydex fund's assets that have nothing to actually do with trader sentiment.

Overall, these sentiment guides look OK for a continued run in gold. I'd much prefer to see less-optimistic public opinion, but that's rare to get after a move like we've seen.

No positions in stocks mentioned.

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