The Bank of Japan holding off on any further action has created a massive Yen carry unwind and a general lack of faith in Kuroda/Abe ability to push the Yen lower. That combined with general hedge fund outflows has big offer in the dollar and has been turbo fuel for what I otherwise consider to be an overextended gold rally.

Before the BoJ, the Commodity Futures Trading Commission (CFTC) grabbed a snapshot of net positioning of trader positions, and we saw our first liquidation since the new year. In a vacuum, we likely would have seen lower gold prices, but no asset exists as such. Keeps things exciting.

We broke the prior highs from March of $1,284, and then it was off to the races. Gold has broken $1,300 but so far failed to hold it in U.S. trading and with the U.K. out for the May Bank Holiday.

Bull Case

  • Depending on how you measure it, 40-60 percent of the world can be considered to be in negative interest rate policy territory, with many G7 yields still negative out to as far as 8-12 years.
  • The big mo: Momentum can compel some new buyers to step in purely for fear of missing out. Holding above $1,300 for a week or so in particular may entice retail and EM buyers back in.
  • What other asset are you excited to buy here? In a way, being completely untethered to any fundamentals can occasionally serve gold very well. Who’s to say that prices are too rich?
  • CTAs won't sell until they are forced to by algorithmic limits, etc.
  • Call option buying is picking up in the market.
  • Physical availability of silver large bars is still tight.
  • Gold large bar bids have been increasing across the board.
  • Traders still have some short Yen carry trades to unwind, so we might still have some DXY selling left. Incredibly, the EUR is now a better funding trade than the JPY.
  • Gold is dominating most every headline in the financial space right now. Depending on your perspective, this can cut either way.

Bear Case

  • Rallies after the first Fed hike are not uncommon and have a half-life of something like 120 days after the initial hike. This is not a normal cycle though.
  • Gold open interest is the highest since 2010.
  • VIX still not indicating particularly elevated nervousness among the investor populous.
  • EFP is very far right. North of $2 tends to hit speed limits if it doesn't have steeper interest rates to support the spot contango discount.
  • Typical demand centers for physical are generally unresponsive.
  • $1,300 (big number), $1,307 (Jan 2015 high) and $1,325 (200-week MA) will serve as big resistance. We haven't been over the 200 WMA since May 2013.
  • Futures positioning is incredibly long. The jump in length is bigger than anything I have on record and last time (November 2008), it took 11 months and a financial crisis to accomplish what we have now done in five months.
  • ETF still not buying it. Flows have been unremarkable since April 19, which was a liquidation.
  • Google searches relating to gold and silver prices are not indicative of any special activity from developed world retail flows.
  • Physical premiums remain depressed. Benchmarks such as silver eagles, gold krugerrands and 90 percent remain at cyclic lows.
  • Scrap and mining selling has increased. Rumors of major producers starting to look at reinitiating hedging programs.

Table

This is every rally of plus-15 percent since 2007. The bottom shows the summary data, and the last line item is the current rally. With an average low-high of 26 percent and $276 with an average duration of 104 days, this current rally is starting to look a bit overextended by yet another metric.

What I found to be interesting, is that largely thanks to the two-week breather we took in March, the dollar gain per day for this rally has actually been the second weakest in our data set. If it weren't for the CFTC data, I would argue that it had reset the table.

Chart

This is the visualization of the above chart. We've had a unique shape, but I'll leave it to the dedicated chartists to say what the heck that means.

Coin Toss

Simply put, this rally has been driven by institutional money, which tends to have limits on how far it can chase without Far East and retail support, both of which gave up around $70 ago. I have been consistently surprised for three weeks now that we have held up this strong.

In reality though, as the price table and chart show, these rallies have plenty of precedent. We are either beyond the average or nearing so by most any metric on here. The blind squirrel will have to find an acorn at some point. Lower.

Being this wrong for this long is a reminder why I don't punt around much in the day-to-day spot price, but it remains an intellectual challenge and one that has had a tidy losing streak of late.

The single data point that would change my outlook the most would be a renewed interest in the ETF or physical product. Until that changes, I'm forced to stay off the freight train higher.

One thing to keep in mind: As the rally gets further extended, gold will start to trade bit more like a risk asset, and correlations due to margin calls and exposure limits will creep higher with other assets.