The CFTC Commitments of Traders data which came out yesterday showed a couple of surprising things:


Speculators (both large and small) aggressively covered short positions while the commercials drastically reduced longs resulting in a significant drop in open interest. This behavior was likely due largely to Monday's huge upside reversal following Sunday night's commodity futures bloodbath which saw front month gold futures trade as low as $1141.70.

The problem for gold bulls is that bottoms are typically formed when bears become stubborn and overly committed to their bearish positions, this COT report is indicative of a market that is flexible and ready to flip back and forth between a bullish or bearish bias - the 7,800 contract (nearly $1 billion notional value) net increase in length by small speculators says it all.

The technical structure of the gold chart also isn't pretty. Despite Monday's huge upside reversal the daily chart is still exhibiting a bear flag pattern as price remains below a declining 50-day simple moving average and has consistently demonstrated an inability to maintain rallies above the $1200 level:


A couple of other headwinds face gold as 2014 winds to a close: bearish seasonality (since 1980 gold has declined an average of more than 50 basis points during December) and the tendency of investors and portfolio managers to sell assets which have performed poorly both for tax purposes and for year end window dressing.

All of this adds up to a strong likelihood that gold will endure one more flush to the downside before we welcome in 2015. From a technical standpoint a retest of the $1130-$1150 support zone seems quite reasonable, however, a breach of $1130 would put the Goldman Sachs $1050 target into focus.