No one saw the gold rally coming – except me

The rebound in gold and commodities has taken many by surprise – but not  me. This morning, US crude oil has punched up through the $50 level – how many foresaw this last month when it was all doom and gloom with Goldman Sachs predicting $22 oil?

Today, I want to cover the gold market, where we have seen a decent rally recently. This rally was preceded by extreme speculator bearishness over recent months.

The Comex gold futures market is dominated by hedge funds and the commercials (trade), and a recent article reveals that hedge funds (the large speculators) have suffered their biggest losses since the financial crisis with August the worst month since October 2008.

I guess one of the reasons is that they have, as a group, been on the wrong side of the gold market, especially since the 20 July plunge low which set the bottom of the market – and they have remained uniformly bearish for many months.

Remember, the strategy of most hedge funds is to ride the prevailing trend. While this is a winning formula when the trend is with you, it fails completely at major turns, such as that in July. And at those times, that is when they are the most committed with the largest number of wrong-way bets.

When markets turn, as gold did in July, hedge funds are very slow to react because their bearish story remains valid in their eyes. Booming stockmarkets were the main feature, and gold, which held little attraction in a low-inflation world, was shunned and actively shorted. There was no ‘reason’ to hold gold in July – unless you were reading the charts, that is.

Mastering emotion is the key to profitable trading

People feel more confident (bullish) as prices rise and less confident (bearish) as prices fall. It is a natural feeling – when you are long and prices rise, you feel good. But a true trader does not let that feeling dictate his or her actions!

In fact, registering that feeling is a warning to start exiting positions and to go the other way, even though it may feel ‘wrong’. And that is what holds many back from mastering the art of trading – the inability to act against their basic emotions that we all feel.

The other factor is the element of fund managers’ ego. Those who rise to this lofty position are naturally endowed with no shortage of this – and men (men dominate in this industry) with large egos find it difficult to admit they are wrong on any subject, particularly on their short gold trades that have produced terrific bragging rights. More humble traders, such as myself and my readers, have no difficulty in seeing a change in the market.

Below is the updated chart from Monday. The market continued its rally to the $1,150 area and has pulled back after testing resistance at the upper line. This line a a formidable line of resistance – it has multiple touch points going back to January.

Gold price spread betting chart

But if the market can punch up through it, the $1,200 area is my next target.