What's next for gold?

With recent falls in the price of gold, some traders are shifting their positions, cashing out of long trades and increasing their short trades. But overall sentiment is still bullish. So where might gold be going next? John C Burford looks to the charts for answers.

As I write on 4 July US fireworks day (real pyrotechnics, but not necessarily in the markets), I have noted a significant shift in investor positioning in the gold futures market.

Remember, the Comex gold contract of 100 oz drives the gold pricing mechanism, including the cash quotes. That makes the commitments of traders(COT) reports a crucial piece of information for traders.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

In my previous emails, I have alluded to the COT reports as describing the severely unbalanced nature of the gold market (less so in silver).

There has been intense investor buying from both the large traders (hedge funds, especially) and the small trader.

Advertisement
Advertisement - Article continues below

I pointed out that this measure of extreme sentiment would inevitably lead to at least a decent price fall.

And I didn't have to wait long after my last gold email for this to occur!

Gold has seen a hefty fall

We have seen a $50 move down to the $1,480 low on Friday:

MWTrader-11-07-04-1

(Click on the chart for a larger version)

As I write, we are seeing an inevitable relief rally from an oversold position.

This down move was pretty much unexpected by the gold aficionados (but then, they always are). How has the COT position changed in this move?

Advertisement
Advertisement - Article continues below

To cut a short story even shorter there has been a large percentage change in the long and short positions.

Here is the latest data as of 28 June:

LongShort
Hedge Funds226,000 (-16%)60,000
Small Trader67,00024,000 (+18%)

These are large percentage changes in a one week period (I have highlighted this period on the above chart within a purple box).

The hedge funds have been cashing out 16% of their long trades, while the small traders are increasing by 18% their short trades (but from a low base).

Advertisement
Advertisement - Article continues below

The COT reports aren't much use unless the readings are very one-sided

Over the years, I have concluded that for trade timing purposes, the COT reports are just not very useful except when sentiment becomes too one-sided.

The reports can help verify a trade set-up that has been researched from other sources, such as my tramline concepts, Elliott waves, and Fibonacci.

But it is hopeless at fixing the timing of a trade on its own.

Also, how one-sided is enough to tip the market over? It's the How long is a piece of string?' question.

But now that long/short positions are becoming less one-sided, at least after one week, the COT report will become less important in my trading unless I see another large swing.

Advertisement
Advertisement - Article continues below

In the meantime, the low on Friday took gold to support at the Fibonacci 38.2% retrace of the entire year's rally, and is currently bouncing.

MWTrader-11-07-04-2

(Click on the chart for a larger version)

But if this support gives way, the next level of support is the $1,450 area:

MWTrader-11-07-04-3

(Click on the chart for a larger version)

I have shown my tramlines going back a year, and believe they are good working models for me to trade from.

Sentiment remains top-heavy and I have yet to read a single article that is outright bearish on gold. If and when gold drops another $100, I'm sure they will start coming out of the woodwork!

Advertisement
Advertisement - Article continues below

Markets make the news and markets make the views.

NB: Don't miss my next trading insight. To receive all my spread betting blog posts by email, as soon as I've written them, just sign up here .

Advertisement

Recommended

Visit/520466/gold-dont-panic-and-dont-sell
Gold

Don’t panic about Iran – but don’t sell your gold either

Markets have reacted calmly to the tension between the US and Iran. But don’t get too complacent. It’s still a good idea to hold on to some gold as in…
9 Jan 2020
Visit/520221/heres-how-gold-could-rise-above-7000-an-ounce
Commodities

Here’s how gold could rise above $7,000 an ounce

That the gold price could hit $7,000 an ounce is a logical and plausible possibility, says Charlie Morris. Here, he explains how it could get there.
30 Dec 2019
Visit/520199/gold-is-in-a-bull-market-and-it-could-have-much-further-to-go
Commodities

Gold is in a bull market – and it could have much further to go

Many investors forget that gold is still the best-performing asset of this century, says Charlie Morris. It could also have much further to go.
27 Dec 2019
Visit/518006/all-the-gold-in-china-money-and-power-goes-east
Economy

All the gold in China: money and power goes east

China has far more gold than official figures suggest – as much as America, in fact. He who owns the gold makes the rules, says Dominic Frisby.
15 Nov 2019

Most Popular

Visit/investments/stockmarkets/600909/will-coronavirus-kill-off-the-bull-market
Stockmarkets

Will coronavirus kill off the bull market?

It seems clear now the coronavirus will at some point go global. And when it does, will it bring down the stockmarket’s bull market? John Stepek looks…
27 Feb 2020
Visit/investments/commodities/gold/600887/gold-price-coronavirus-cost-of-face-masks
Gold

Gold, coronavirus, and the high cost of face masks in northern Italy

The price of gold is spiking – as it always does in a global panic. But this bull market predates the coronavirus epidemic, says Dominic Frisby, and w…
26 Feb 2020
Visit/personal-finance/pensions/pension-tax/600877/why-it-makes-sense-to-scrap-higher-rate-pensions-tax
Pension tax

Why it makes sense to scrap higher-rate pensions tax relief

The point of pensions tax relief is to keep you out of the means-tested benefits system. The current system is ridiculously generous, says Merryn Some…
24 Feb 2020
Visit/517625/tr-european-growth-trust-why-investors-shouldnt-overlook-europe
Sponsored

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