Since late February, gold has performed poorly compared to the S&P 500, oil, Treasury bonds and the U.S. dollar. The yellow metal has lost almost 7 percent since peaking on February 28.

The underperformance has caused the large speculators to ratchet down their holdings in gold. Last Friday’s Commitment of Traders (COT) report shows that the group is long just fewer than 135,000 contracts.

While this may seem like a relatively bullish stance, it isn’t. Gold is different than most other investment vehicles in that the large speculators are rarely bearish toward the commodity.

So rather than measure the COT report based on net long or net short holdings, you want to measure how long the large speculators are relative to the past.

Looking at the COT reports for the last three years for gold, there have been very few times that the group has held less than 140,000 contracts net long.

The last two times we saw under 140,000 contracts held long were December and September. In both these instances, gold rallied sharply over the next few months.

Another factor that looks promising for gold is a possible inverse head and shoulders pattern forming on the weekly chart. The neckline is at the $1,800 level, the shoulders are in the $1,600-$1,625 range and the head was formed by the December low at the $1,550 level. Gold is at about $1,665 now.

For the pattern to be confirmed, gold will need to rally to the $1,800 level and then break through that level.