I'll repeat – has gold finally hit a low?

It must be prudent for gold bears to take at least some money off the table, says John C Burford. It's time to look to the long side.

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.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

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.

So, why did gold finally get the message a day late by spiking up by $25?

Advertisement
Advertisement - Article continues below

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:

Non-commercialCommercialTotalNon-reportable positions
longshortspreadslongshortlongshortlongshort
(Contracts of troy ounces)Open interest: 536,215
Commitments
160,479147,438118,844218,055225,105497,378491,38838,83744,828
Changes from 11/24/15 (Change in open interest: 806)
-1,6135,5902,2633,163-6,3703,8131,483-3,008-677
Percent of open in terest for each category of traders
29.927.522.240.742.092.891.67.28.4
Number of traders in each category (Total traders: 343)
1391341185354255250

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:

15-12-2-MWT-2

But it soon caught a massive bid and rocketed up. This is the chart as of late Friday:

15-12-7-MWT-3

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.

Advertisement
Advertisement - Article continues below

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?

Advertisement
Advertisement - Article continues below

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.

Advertisement

Recommended

Visit/519524/how-my-2019-spreadbetting-tips-fared
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
Visit/519285/bettingon-politics-some-safe-labour-bets
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
Visit/518916/ds-smith-will-deliver
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
Visit/518908/betting-on-politics-28
Spread betting

Betting on politics: don't put your money on the SNP

Scottish voters are strongly opposed to another independence referendum, says Matthew Partridge. That opens up a few tasty punts against he SNP.
29 Nov 2019

Most Popular

Visit/520525/currency-corner-how-high-can-the-pound-go-against-the-euro-in-2020
Currencies

Currency Corner: how high can the pound go against the euro in 2020?

In the month in which we should finally leave the European Union, Dominic Frisby takes a look at the pound vs the euro and asks just how high sterling…
13 Jan 2020
Visit/520575/20-predictions-for-the-2020s
Investments

Where will markets be in 2030? Here are 20 forecasts for the 2020s

A lot has changed in the last ten years – stockmarkets soared, technology transformed our lives and politics has changed beyond measure. Here, Dominic…
14 Jan 2020
Visit/520338/how-much-the-state-pension-will-rise-by-this-year
Personal finance

How much the state pension will rise by this year

While Boris Johnson promised to hold a full budget within 100 days of his election victory, many of the details of next year’s state pension increases…
10 Jan 2020
Visit/520553/money-minute-wednesday-15-january
Economy

Money Minute Wednesday 15 January: UK inflation and house prices

In today’s Money Minute, we look ahead to the latest UK inflation and house price figures, plus we have Germany’s GDP data for 2019.
15 Jan 2020