The recent rise in the U.S. dollar has been a bane for gold prices. In fact, the front-month gold futures contract has dropped nearly 6% since peaking in early December 2009.
Adding to the precious metal's malaise, concerns over the massive sovereign debt loads among several European countries sent investors scrambling to unload euros in favor of the less volatile U.S. dollar.
The situation has changed dramatically in recent weeks, however, with Germany and the European Union pledging to support Greece and other struggling Union members. The news lit a fire under the euro, and seems to have put a stop to the U.S. dollar's run higher.
Unfortunately for the dollar, investor sentiment is nearing a bullish extreme. Specifically, according to our internal data, net-long dollar positions among large speculators are currently at a five-year high. Furthermore, recent media stories, including Bloomberg's "Dollar Optimism Rises to a 15-Month High on Global Budget Concern," and Time's "The Carry Trade: Betting on Bad Currencies," have extolled the virtues of betting ‘bullishly’ on the U.S. dollar. Should this optimism towards the greenback begin to unravel, it would be a considerable boon for gold prices.
Meanwhile, gold prices are taking advantage of this weakness in the U.S. currency. Specifically, the SPDR Gold Trust (NYSE: GLD, Stock Forum) exchange-traded fund (ETF) is in the process of rallying off support at its 32-week moving average. The trust pulled back to this long-term trendline on Feb. 5, and has since jumped nearly 7%. What's more, GLD is now trading above former support at its 10-week moving average. This trendline duo has helped usher the trust more than 65% higher since October 2008.
Judging from GLD's sentiment backdrop, there is plenty of fuel left in the tank for a continued run higher. For instance, the security's Schaeffer's put/call open interest ratio (SOIR) of 0.66 ranks above 83% of all those taken during the past year, pointing toward lingering pessimism among options traders.
That said, it would appear that opinions are changing, as data from the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) indicate that 1.72 calls were bought to open for every one put purchased on GLD during the prior two weeks. A continued unwinding of this negativity could provide additional buying pressure for the trust.
Finally, short sellers have begun to repurchase their bearish bets on the ETF. During the past month, the number of GLD shares sold short plunged by roughly 7.6% to 13.27 million shares. Should these short sellers perpetuate this short-covering trend, it could create a tailwind for the security.
Disclosure: Joseph Hargett has no financial interest in any of the equities or products mentioned in this column.