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

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.

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-date record.

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-commercial Commercial Total Non-reportable positions
long short spreads long short long short long short
(Contracts of troy ounces) 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

 

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:

Gold price spread betting chart

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

Gold spread betting chart

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.