Gold is turning – this is how to profit

John C Burford examines trading sentiment data to see where the gold price is heading to next.

On Friday I wrote about gold, and how hedge funds are at their most committed at major market turns. The eye-opening multi-year chart below shows the net long/short position of hedge funds compared with the gold price. Note that in every case, major highs and lows correspond almost exactly with lows/highs of the net long position, as highlighted by the dashed vertical lines.


The all-time high in 2011 was marked by an all-time high in net long positions. This is when the hedge funds were at their most committed ever but should have been in exactly the opposite stance if they wanted to maximise profits.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Conversely, at the July plunge low, hedge funds were actually net short a situation I believe was unprecedented. Given the large army of extremely loyal always-long gold bugs (who believe in the metal no matter what the price is doing), and the fact that the gold trade (who are always on the other side of the hedge funds' futures long positions) are usually hedging their mine production by selling futures forward, this is a staggering development.

This demonstrates the extreme bearish sentiment in the market in the summer and proves the accuracy of the title: "They love 'em at the highs, hate 'em at the lows".

Advertisement - Article continues below

The market's changing its mind on gold

So with the market having moved up in recent days, what is the current position? For that information, we turn to the latest commitment of traders (COT) data,which shows changes to the futures make-up during the previous week. Here is Friday's data which refers to Tuesday, 6 October:

Non-commercialCommercialTotalNon-reportable positions
(Contracts of 100 troy ounces)Open interest: 625,986
Changes from 09/29/15 (Change in open interest: 25,896)
Percent of open in terest for each category of traders
Number of traders in each category (Total traders: 373)

Clearly, the speculators have increased their long trades while decreasing their short ones. The trade (commercials) have taken the other side of these trades and increased their hedging activities into the rallies. This is a clear sign that the speculators are switching sides and are gradually buying into the bullish case.

Of course, if this keeps up and the buying pressure can dominate, the market will rise to a point where the speculators are overwhelmingly long and that will be a sign the rally is about to turn. But that day is some way off, I believe. First, I need to see headlines in the mediasuch as "Goldman Sachs targets $2,500 gold", or "Gold production down 35% this year", or "China's central bank buys 25,000 tons of gold".

The mechanics of a turning market

The attitude of the commercials is directly opposite to that of a bearish short-selling speculator who certainly wants to drive the market immediately lower as low as possible, in fact.

That makes a huge difference to the shape of gold bull phases. Commercials who hedge are not normally interested in covering their shorts in the futures market they deliver gold on their contracts when they mature. On the other hand, speculative shorts, who never want to touch the stuff, always have to cover their shorts before their contracts come due, and are therefore a source of buying pressure down the line.

That dynamic is one reason gold bull markets can often carry on much higher than most expect and can carry an unusually high degree of net long speculative positions before they turn.

Advertisement - Article continues below

This morning, the market has jumped above the $1,250 level and above my major (pink) trendline which starts in 2012:


I also have a valid tramline pair marked in blue. This trendline break is a bullish development.

Here is a close-up:


The move above the August high has helped confirm my original wave count we are now in a third of a third. This is a most powerful set-up and we are seeing fireworks well before 5 November!



Spread betting

Boeing's share price plummets: here's how to play it

Boeing shares have fallen by a third this year. But there could be worse to come. Matthew Partridge explains how traders should play it
10 Feb 2020
Share tips

How my 2019 spreadbetting tips fared

Matthew Partridge reviews performance of his 2019 spreadbetting tips. This year’s winners include Bellway, JD Sports and Taylor Wimpey.
17 Dec 2019
Spread betting

Betting on politics: some safe Labour bets

Matthew Partridge outlines a few flutters on what should be safe Labour seats in the general election.
10 Dec 2019
Spread betting

DS Smith will deliver: here's how to play the share price

Packaging group DS Smith is profiting from the online retail boom. Matthew Partridge explains how traders can play the share price.
3 Dec 2019

Most Popular

House prices

The biggest risk facing the UK housing market right now

For house prices to stagnate or even fall would be healthy for the property market, says John Stepek. But there is a distinct danger that isn't going …
17 Feb 2020

The euro’s slide against the US dollar looks set to continue

The euro has been in a bear market against the US dollar for two years now. And on a broader scale since 2008. A decline like that is telling us somet…
19 Feb 2020
Share tips

Three overlooked stocks to buy now

Each week, a professional investor tells us where he’d put his money. This week: Joe Bauernfreund, portfolio manager at the AVI Global Trust, highligh…
17 Feb 2020

Why investors shouldn’t overlook Europe

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, tackles investor questions around Europe’s economic outlook and the conseq…
6 Nov 2019