Gold gearing up for another upside attempt?

The most significant driver for gold so far during 2012 has without a doubt been the speculation about whether or not additional stimulus will be provided by the US Federal Reserve. On several occasions since January, we have seen the price of gold move wildly in both directions as the on/off QE discussions have been raging.

The price movements in gold over the last couple of weeks has been one of consolidation above important support in the low 1,500 region. Market conditions were stable until the spike above 1,610 following the weak US employment report, which raised speculation about QE.  This speculation was only somewhat quashed by Mr. Bernanke's non-committal statement to Congress a few days later.

There has been much speculation that the strong rally was primarily driven by short covering as up until the US job report. Speculative investors had been building the largest gross short position in gold futures since 2005, resulting in the net long position being at the lowest level since December 2008, according to weekly data from the US Commodity Futures Trading Commission. 

The data covering the week ending June 5 did show the biggest weekly increase in net long since January, but it was primarily due to an increase in gross longs by 2.4 million ounces to 18.6 million while the gross short only saw a small 0.4 million ounce reduction to 5.7 million ounces.

From this data we can conclude that a large gross short position still exists, and the initial rally was more due to fresh buying followed by weak longs getting out again last Thursday. Having stabilized after the failed attempt above 1,600, gold could be gearing up for a renewed upside attempt either driven by a risk-on rally or talk about QE ahead of the FOMC meeting next week. This could lead to additional short-covering among those holding the elevated short positions.