Commodities | Jul 21 2011
By Greg Peel
Gold fell from around $1600/oz to $1587/oz on Tuesday night as markets saw rays of hope in both the eurozone debt issue and the US debt ceiling issue. To Dennis Gartman, this seemed like a possible beginning to an overdue correction in the runaway precious metal. Technically gold did not take out its low of the previous day so the technicians would not yet be signalling the correction, and as it was gold rallied back to US$1600/oz last night.
Gartman's correction call appeared in his report published prior to last night's reversal. However the fundamentals of his call are unchanged in the interim. On Monday night, when gold hit US$1600 for the first time, a “stunning” 10,523 CME gold futures positions were opened, or almost 2% of the overall open interest. Having reached the new benchmark level, slow-to-move traders were clearly looking toward the next blue sky shift.
The open interest in gold futures is now the largest on record, exceeding the previous record made at the last major high of US$1550 in April. Gartman notes that once that record was set in April, gold was barely able to move any higher. Indeed, once momentum was lost, the Johnny-come-latelies were caught out and the susbsequent drop, back under US$1500, was somewhat inevitable.
The tried and tested reality is that once “everyone” is long there's no one left to buy, so nerves set in and the subsequent bail-out is frantic.
But as the chart shows, and the new July high attests, the correction in April did little to impact on gold's underlying upward trend. It's just that nothing ever goes up forever in a straight line and…well we all know about stairs and elevators.
Until proven otherwise (and I would wager the rebound last night is not yet sufficient “otherwise”), Gartman is anticipating a drop back to the US$1500-1525 region in reasonable haste. This would take out those Johnny-come-latelies once more and restore a healthy order to the ongoing bull market for gold.