It seems almost immediately after I wrote that the rally in gold was overcooked (at $1,295 spot) and would likely not break $1,300 that the 10-year yield broke below 2.15 percent and has been on a tear ever since (currently 2.078 percent).

Long-term growth projections are being continually revised lower, and inflation still hasn't truly shown up, so FOMC doves have had the upper hand of late. Even Dallas Fed President Robert Kaplan seemed to be joining the chorus of those who would doubt a third rate hike this year.

For what it's worth, they are correct in view of the uncertainty around FOMC balance sheet reductions, but my view had been that we would likely get the December hike anyway. I think that's no longer the case. The problem from here, though, is that gold is approaching record territory for crowded long trade, so we are likely running out of new buyers if there is any cessation in new bullish headlines.

Bull Case

  • North Korea conducted its sixth nuclear test Sunday and 10 times the power of the previous test from a year ago. They are likely to test an ICBM in the next five days.
  • 10-year rates have been a one-way trade since early July, trading 2.4 percent to 2.08 percent.
  • DXY is off 10 percent since the beginning of the year.
  • The big if: An equity selloff will likely shove the rest of those thinking about gold into some performance chasing.
  • Great specter of uncertainty: war, politics, debt ceiling, equity markets, fill in the blank.
  • European Central Bank President Mario Draghi is in a pickle. He wants the euro below 1.20 but wants to stop QE. Needs to be slightly hawkish but less so than BoE or FOMC. How to coordinate movement in the prisoner's dilemma? Expect some showing of his hand either way Thursday.
  • Auto-correlation: Nobody chases performance like GLD investors. A move higher only brings in more buyers for that instrument. Closely follows 40 DMA.

Bear Case

  • FOMC is to begin letting $6 billion per month of its balance sheet mature uninvested fairly soon (this month?). This is likely to have a bigger impact at the front end of the curve than the back end, but I don't know that growth projections are so bad as to allow an inverted yield curve. More than anything else, higher rates are generally bad for gold.
  • Market expectations for a December hike now down to 29 percent based on Fed Funds Futures. How much further until it's all priced in?
  • Gold market is crowded long (chart below).
  • 14-day RSI on gold is screaming overbought at 76 — highest level since February 2016. Oddly enough, that move was driven by oil, Korea and Trump as well. The more things change ...
  • Copper rally declaring that inputs are still being used at a rapid pace. Perhaps China is growing better than we think?

Chart 1

Crowded movie theater. There are fewer outright gold futures shorts than in 2012, and longs are at 12-month highs. To put in perspective, there were 87,000 total short contracts at last Tuesday's measurement. A good hour's trading will clear 50,000 contracts.

Chart 2

Gold (white candle) has clearly outperformed 10-year yields and the USDJPY since the last time it was north of $1,300. I view that as long-term constructive for gold as it's an indicator of investor favorability to the yellow metal. It makes absolute sense that investors increase their holdings of hedges given the macro breakdown.

However, and I don't have anything objective for this particular observation, I think it's outperformed by a bit too much. The 14-day RSI is at its highest levels since a $70-plus day drove the RSI to $80 in February. Like golf or cholesterol, the RSI is not something you want a record-high score in.

To be clear, overbought status can be cured like any other rally, either through time or price. Just because we are overbought and crowded long does not guarantee a fallback, it just lessens the intensity of subsequent headline-driven rallies as well as improving the odds of the "elevator down."

Coin Toss

An extended market with lots of gains to pocket and crowded longs make me nervous. A bit of innocent profit-taking can cascade pretty quickly into downside momentum. Sure, it can always go further, but you effectively get speed-brakes on the upside and multipliers on any downside.

The news flow has been almost entirely one-way (bullish for gold) recently. The macro picture remains supportive, so we aren't calling for a crash, but the balance of risks seems to favor the bears here. In good news, this is the first up move we have seen that also brought a pop in vols with it.

Silver is much less crowded long, and all eyes are on this incredible copper rally.