We explained a month ago how gold was flashing a bullish signal based on the futures positioning in the COMEX gold market. The indicator we closely follow is the rate of change of short positions of commercials (one of the 3 market participants in COMEX).
The gold futures chart to makes that point (courtesy of Sharelynx, annotations are ours). The key is to focus on the rate of change because it determines the stopping power of a rally, as explained several times in the past. When short positions are being accumulated at a high pace, compared to previous instances, there is a higher probability that the rally will be short lived.
Since we wrote our bullish article in mid-March, the situation has slightly changed. The commercials have built up short positions at a high pace, as evidenced by the red rectangle. Compare the rate of change of their short positions, i.e. the last blue bar on the second pane, with similar situations in the past. Do you see why the recent rally has been capped?
The other important indicator we are monitoring is TIPS. As explained last week, the clearest driver for gold, in our view, has been inflation expectation, represented by TIPS (inflation-protected US Treasury bonds), an instrument that reflects real yields for maturities ranging from 5 to 30 years. TIPS moves almost perfectly in sync with gold.
The chart shows how inflation expectations and gold are forming a huge divergence. Something has to give, either inflation expectations will become deflationary (which will probably be bad for precious metals) or inflation expectations will continue to rise which would result in a structural breakout of TIPS (in which case precious metals should be revised upward).
In summary, there are mixed signals in the precious metals market at this point, based on the two indicators that are driving the metals. That is also the reason why precious metals are not trending. We monitor these indicators very closely, and will update readers when we see signs of a trend change appearing.