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Gold has been on a tear lately, as the price of this precious metal has been surging for the past three weeks. In fact, since the end of June, the price of gold has climbed by more than 9% and is currently up by roughly a hundred dollars from its lowest level this year. As of this writing, gold is trading just below the $1,300 per ounce level.

This has prompted several commodity traders to consider catching the bounce by establishing a long gold position. After all, it’s always tempting to catch a market bottom and ride the rest of the move up. However, several signs are starting to hint that the commodity could start losing some of its luster.

1. Short Positions on Gold Futures on the Rise

The latest Commitment of Traders report from the U.S. Commodity Futures Trading Commission revealed that big market players, which include hedge funds, upped their short bets on gold to record levels.

Commitment of Traders Report

As you can see from the table above, the number of short gold contracts of large speculators rose to 143,657 in July 9, 2013. This is almost a 6,000 increase from the previous week! On the other hand, long contracts rose by a mere 1,502.

Note that 90% of the gold market is composed of speculators so it’s important to take note of how these top dogs are trading!

2. India’s Demand for Gold is Falling

A few days ago, India’s trade report showed that gold imports have declined 81% in June to just 31.5 tons from 162 tons in May and 141 tons in April.

Why is this relevant?

Well, India is considered as the world biggest consumer and importer of gold, purchasing approximately 25% of the world’s gold. It is estimated that Indian households own 11% of all the gold in the world, which is equivalent to around $950 billion.

All in all, India buys up around 800 tons yearly to be used in the creation of jewelry. When India’s demand for gold declines, it could also mean that the price of gold could take a hit.

3. XAU/USD Still Technically in a Downtrend

Despite gold’s recent rise, the fact remains that the overall trend is still downwards. It has consistently been making lower highs and lower lows.

XAU/USD Daily Chart

A look at the daily chart shows that gold is approaching the $1,300-$1,350 area, which is major pullback area. The level clearly coincides with, not only a former support area, but also the 61.8% Fibonacci retracement level.

Moreover, the Stochastic indicator also suggests the rally could be exhausted, as it is showing that conditions are overbought and that price could turn. And finally, you can see a clear bearish divergence as price has made a “lower high” but the oscillator made a “higher high.”

If you’re unconvinced with these, and believe that gold is going to head even higher, please let me know your thoughts by leaving a comment below. I’ll be sure to read them!