On Friday, something important happened: gold (and silver) rallied hard. But that should have happened on Thursday on Draghi Day when the euro rocketed by over three cents, and the German Dax stock index plunged by 4%. Yet gold remained unmoved. Surely, most would have expected gold at least to reflect Thursday's much weaker dollar?
After all, the 'reason' gold has been so weak is that the US dollar has remained strong or so the pundits maintain. But does this explanation hold up now? I think not.
That reasoning is the result of the usual 'news makes the markets' ideology. I have many times debunked that theory and I am doing so again here.
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So, why did gold finally get the message a day late by spiking up by $25?
It is a fact that retail sales of gold (and silver) bullion and coins have been booming, as have Chinese and Indian sales, according to reports.
And the US Mint recently reported that a new batch of platinum Eagle coins selling out in seven minutes of launch! 2015 silver bullion sales also broke the previous year-to-daterecord.
The US public cannot get enough of the metals yet the hedge funds have remained steadfastly bearish. In fact, as of 1 December, they had again increased their short bets. The public is very bullish and the hedge funds are heavily bearish. What a divergence of opinion!
The latest COT (commitments of traders) data shows exactly that. The hedgies are about equally short as long, while the small speculators are now net short. Both large and small speculators added to short bets (or reduced their long bets) going into the massive turn-around on Friday:
Swipe to scroll horizontally
(Contracts of troy ounces)
Row 0 - Cell 1
Row 0 - Cell 2
Row 0 - Cell 3
Open interest: 536,215
Commitments
160,479
147,438
118,844
218,055
225,105
497,378
491,388
38,837
44,828
Changes from 11/24/15 (Change in open interest: 806)
-1,613
5,590
2,263
3,163
-6,370
3,813
1,483
-3,008
-677
Percent of open in terest for each category of traders
29.9
27.5
22.2
40.7
42.0
92.8
91.6
7.2
8.4
Number of traders in each category (Total traders: 343)
139
134
118
53
54
255
250
Row 8 - Cell 7
Row 8 - Cell 8
In last Wednesday's post("Has gold finally hit a low?"), I set out my case that the recent low could be the final low before an explosive rally.
I needed to see a move above the upper trendline to confirm the rally had started. But on Friday, the market initially moved down back to the lower support line to the $1,046.50 level on release of the US jobs report:
But it soon caught a massive bid and rocketed up. This is the chart as of late Friday:
That dip to the $1,046.50 level was the final wipe-out of sell stops before the surge upwards. And when the market broke my upper tramline, that was the signal to start covering short trades and reverse positions, or take new longs.
In just a couple of hours, the rally hit T3, which is always my first major target. Nice work.
And in the space of a day, the previous three major highs have been taken out, and the gains for the shorts of the past month have been erased. That is the power of a short squeeze and is well worth stalking.
Those who had forecast the $1,050 level have been vindicated. Well done them. I salute you!
But how many of you will respond now that your long-standing target has been finally hit?
Most I am sure will be looking for more. It is perfectly natural to bask in the glow of an important forecast panning out and to want more. But if this rally has legs, those who are hanging on will see their profits steadily erode. This is the supreme test of a trader (or investor).
A common response in this situation is to close your eyes and hope that the market resumes its decline. But what if it doesn't?
Does the hapless trader have a plan that was thought out when the original short trade was initiated? Because that is the key element that is missing for many traders. And that is why I have developed my split-bet strategy whereby partial profits are automatically taken at key targets.
The trader's graveyard is littered with failed traders who had a terrific profit only to see it vanish by stubbornly refusing to see that the trend had changed.
Of course, the budding rally in gold could peter out at any time, but with the $1,050 level being a major long-term support level (it is at the Fibonacci 50% retrace of the bull run from the 'Brown low' in 2002 to the all-time high in 2011, it is surely prudent for the bears to take at least some money off the table and look to the long side.
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John is is a British-born lapsed PhD physicist, who previously worked for Nasa on the Mars exploration team. He is a former commodity trading advisor with the US Commodities Futures Trading Commission, and worked in a boutique futures house in California in the 1980s.
He was a partner in one of the first futures newsletter advisory services, based in Washington DC, specialising in pork bellies and currencies. John is primarily a chart-reading trader, having cut his trading teeth in the days before PCs.
As well as his work in the financial world, he has launched, run and sold several 'real' businesses producing 'real' products.
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