Still overbought

Gold closed a volatile week nearly unchanged, forming a bearish "hanging man" candlestick on the weekly chart.

RSI and MACD on the daily chart indicate that the yellow metal is still overbought in the short term. It is likely to require several more days of consolidation before resuming its uptrend.

Steve Saville notes that the commercials (large holders of positions in the physical commodity — which figures in the course of their business, such as mining or jewelry-making) are net short the metal, and that their net-short position is at record levels. He points out that the last time the commercials' net-short position peaked near these levels, exactly two years ago in early October 2005, gold fell 5% and the HUI index of unhedged gold-mining stocks fell 14% in less than four weeks.

Troy Schwensen, however, cautions against misreading the implications of extremes in the commercials' net-short position, pointing out that the commercials were heavily net short during gold's massive rally in 2005-2006. That period includes the brief correction mentioned by Saville.

So if the commercials' net position by itself doesn't provide a definitive indication of gold's future direction, where else can we look for clues?

Adam Hamilton again rides to the rescue, pointing out that gold has shown pronounced seasonality during its current bull market. He found that the price of gold will surge during an average September, then correct sharply into mid-October. The ensuing rally will be the strongest of the year and, on average, will last until the following February.

Of course, seasonality can only be a guide to price tendencies at a given time of year and should not be relied upon by itself in making trading decisions. But the annual pattern unearthed as a result of Hamilton's research has played out quite accurately over the past several weeks.