We've been noting the declining internals of the gold market which have suggested that this rally may not be sustainable. Last week, we looked at the 2015 metal markets in general and noted some of the details that have fueled gold's recent rally, including sovereign currency destruction, deflation and Russian credit being relegated to junk status. These headline grabbing issues have brought small speculators back into the gold market based on gold's relative value as it was trading nearer to $1,200 per ounce just earlier this month, and currency destruction rhetoric.
Unfortunately for the small speculators and those late to the game, it appears that this rally is about over. Commercial short hedgers have been very price sensitive over the last year. Three times the market has attempted to hold above $1,300 and all three times it was turned lower by heavy commercial selling. Looking at the chart below it is easy to see that their behavior is not only similar at this point to the past rally attempts but even more aggressively negative than the previous two attempts at these price levels.
Last week's Gold, Platinum, Silver and Copper Outlook for 2015 explained a bit deeper, "Commercial traders have sold more than 25,000 contracts since the beginning of the year while open interest has declined by nearly 37,000 contracts. Healthy rallies see growing open interest. This decline is most distinct in the gold market and that’s why we feel gold futures will fall faster than platinum futures and bring the price of platinum back above the price of gold."
Commercial traders are clearly offloading the inventory they picked nearly 10% lower and pocketing the cash accrued to their futures accounts. This morning's small flight to safety as fearful traders come in and buy gold due to the stock market's sell-off should be viewed as a selling opportunity in gold futures. It has become quite clear that $1,300 is the mean value area in the gold market where commercial traders will continue to be sellers above this price and buyers at steep discounts.
