I’m not going to waste time with a long-winded introduction today. Just look at this chart:
The thought for today will be short and sweet.
What we’ve got here is the gold price (yellow) and the size of short gold positions (red) over the last seven years as traded on the commodities exchange, or COMEX. It’s important to realise that by far the biggest gold market exists not in bullion, but in paper futures contracts – mostly traded on COMEX.
This ‘paper’ trading is mostly speculation. The futures market intitially cropped up to allow commodity producers to sell production in advance. That way they knew what they would get for their production, and the buyers knew in advance what they would pay.
But that part of the market is pretty insignificant now. What you’ve got today are a load of speculators either trading short or long, as their whims dictate.
The ‘short’ action is significant. And it has a profound effect on the gold price. In fact, to look at the chart, you’d say it has a very predictable effect on the gold price.
The short gold position has never been as large as it is today. And historically, every time the short action has breached the 40,000 contracts level, gold has staged a very decent recovery – the green arrows in the chart. Today’s short action is over 74,000 contracts…
While short positions are growing, the gold price dips. That, of course, stands to reason.
The message for gold bugs today then, is don’t worry about gold’s lacklustre performance. The thing to keep your eye on is that red line – the short positions. If and when the shorts unwind, there could be a big reaction in the gold price.
Now, that’s obviously good news for gold owners… but it’s even better news for gold mining stocks.
Miners are basically a leveraged play on the gold price. So any $1 rise in the gold price should be reflected many times in their share prices. Just a thought…
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