Gold is not glittering so much these days

The blogosphere was atwitter yesterday following Ben Bernanke’s class presentation at George Washington University. He did a hatchet job on the idea of the US ever going back on the gold standard, and the overall idea of having a gold standard period. This is obviously a major hot-button topic in both the markets and the broader world these days, so naturally there have been some heated reactions. I won’t wade into that particular battle, but did think it’s worth looking at how the metal is doing.

The chart below is the continuous front-month gold futures contract with open interest (green) and volume (purple) plotted below. There are some interesting things to be gleaned from the last two years of trading activity.

Gold Chart

Two things jump out at me.

First, notice the general downward slope in the peaks of Open Interest (OI). Ignore the sharp declines which are spaced through as that represents the futures roll-over period. Just look at the relative heights of the peaks and how they have been sloping lower since early in Q4 of 2010. That’s a sign of falling participation in the market, especially over the last several months following peak last year. This is a good explanation for why gold hasn’t been able to manage even a retest of that prior peak on the last couple of upswings.

The other observation, which is harder to specifically see the chart, is that we’ve seen a pattern shift in volume. Heading into the peak in August the volume spikes tended to be on moves higher. Since then, though, the major volume spikes have all come on big down days. That’s an indication of a change in psychology whereby the longs are no longer as secure in their positions as they were previously and are thus quicker to exit, and/or shorts are more eager to jump in.

I think gold is in trouble here and could easily fall back below 1500 on the next move down. That sort of thing would probably be indicative of support for the USD, but the correlations these days have become somewhat muddled, so it’s hard to be sure.


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