Last week, it seemed bulls and bears were merely trading punches as spot metal vacillated between $1,200 and $1,180. Despite the apparent draw, some real damage was done to gold's momentum.
Bullion ended the week as it started—with short selling. Friday's short selling, though, was a lot more aggressive. Open interest shot up by nearly 20,000 contracts on Friday as prices sank. The buildup replaced the contracts that had been offloaded when shorts covered their midweek bets. . .a whole new wave of short sellers came to the market Friday.
The move came after money managers liquidated long positions to a level not seen since April 2009. The Money Manager Strength Index (MMSI) fell below 90 last week as 9% of portfolio runners closed out long gold positions. MMSI measures the bullishness of managed gold futures on a scale of 1–100; it had been topping out in the high 90s for months.
Gold prices are now precariously close to a bullish trendline emanating from the October 2008 pivot point low. If bulls can't keep spot bullion above $1,180 by week's end, bears will be greatly emboldened to push prices lower.
What if the selloff occurs? Will it spell the end of gold's run? No, not even if gold trades with a $900 handle. After all, there was a $200 swoon in gold prices when the MMSI pitched 26 points lower from August–September 2008. Look what happened afterward.
Real danger for gold's longer-term uptrend won't be signaled until prices break the trendline passing through the 2006 lows. Today, that's at the $780 level. The fundamentals that engendered gold's bull market haven't changed. There's been a lot of fear premium built into gold's price, though, which is now being eroded.
Bulls and bears are headed for a showdown. This week ought to be interesting.