It seems as though the story is far deeper than traditional correlation. The US economy seems to be improving and stocks are therefore, at the margin, perhaps a better buy than fear driven gold. Moreover, the Fed is slowly being expected to taper off its extremely easy monetary policy. Some traders were expecting the move however.
As of Tuesday of last week, there were a record number of shorts in the gold market according to CFTC data. Large hedge funds and other large speculators were holding a record number of short deltas or a record number of positions that would benefit from lower prices.
The data suggests that this is the lowest number of speculative net longs in the market since July 2007. The last time there was a record number of high net shorts and low net longs is displayed in the chart below. The chart during this period is rather interesting. The record amount of shorts and the lack of longs may have fuel a massive rally. The chart suggests that after a quick double bottom in July 2007 gold then rallied 30%.
While the economic and financial backdrop is dramatically different during the aforementioned period, the data and resulting price action is very interesting and calls attention to one-sided thinking. While everyone is looking down, perhaps it is prudent to look up, with a tight stop naturally.
