Most nearly every week we try to give an update on the Commitments of Traders in certain markets. This week I would like to focus on gold since it has been one of the best, if not THE best performing commodity futures market this year.

Those of you who have followed my writings for any length of time know that I place great importance on SENTIMENT when it comes to discerning market price action and behavior. Sentiment moves markets; understand it and you will be on your way to being a successful trader. Fail to grasp it, and you will more often than not end up losing money.

One of the ways we can gauge sentiment is by looking into these CFTC reports. As we watch the movements and positioning of all the various categories of traders, we can get a sense of whether bullish sentiment is growing or ebbing and conversely, whether bearish sentiment is rising or declining.

Let’s start with the total open interest [including futures and options].

I have drawn in some lines on the graph to help make my points a bit clearer.

One of the things that concerned me with recent rallies in gold during the last few years is that they never seemed to generate enough bullish enthusiasm to last more than a relatively short time before flaming out. The reason was evident in this chart – open interest was not growing in a consistent fashion but continued a general trend of declining. Notice the slope of the line from left to right and how it continued to decline.

While we would get fits and bursts of open interest increases, the pattern was still one of lower highs and lower lows. Much like what we look for in a stock or commodity price chart, this tells us that the general direction was down.

Why is this important? Think of price as a type of rocket. A rocket needs a constant force to propel it higher against the downward pull of gravity. While it may climb, as soon as the fuel or force subsides, gravity exerts its influence and back down it comes.

Price is exactly the same. It requires CONSTANT FORCE to keep pushing it higher. Remove it and gravity takes over and down it comes. You might say it this way – Bull markets require constant buying to drive them higher while bear markets can fall without the application of force. Gravity can pull them lower.