Gold getting overbought

The sharp rise in Comex open interest suggests short-term caution. But the background for gold’s outlook just gets better and better.

Gold and silver rallied this week, though this morning there is evidence of profit taking ahead of the weekend. In European trading this morning, spot gold was $2704, up $15 from last Friday’s close. And silver was $30.50, up 12 cents on the same timescale. Comex volumes in both were moderate.

Open interest in the gold contract has risen sharply, less so in silver. This is illustrated next.

While consistent with growing bullishness, to see gold’s Open Interest rise so sharply brings the risk of a correction with it. What we don’t know is the quality of buying: are they momentum buyers, or are they Managed Money buying on an assessment that the inflation outlook for the dollar is deteriorating, and the Fed is in a difficult position?