It’s tough being a gold investor right now.
Gold is going through a brutal period, having lost eight percent over the past three months alone and 11 percent from the January high. During that period, the dollar has gained seven percent against a basket of major currencies, putting tremendous pressure on the dollar-denominated asset.
But now, a leading commodities trader is saying the pessimism is overdone and a turnaround could be around the corner.
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Bill Baruch, president Blue Line Futures, a leading futures and commodities brokerage firm, says that the Commitments of Traders report by the Commodity Futures Trading Commission (CFTC) is giving important clues that the extreme selling momentum and pessimism in the gold market could portends good times ahead.
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Specifically, he points out that something quite unusual has been happening: Managed money short positions have surpassed long positions for four weeks in a row with total short positions reaching near-record levels. He says that traditionally the opposite has been the norm with gold sitting in a net long position (managed longs outnumbering the shorts).
According to Mr. Baruch, such a pattern has only played out just two times previously with gold rallying in both cases.
The first time was in July 2015, after which gold bottomed two weeks later then rallied 11 percent.
The second such scenario happened in November 2015, with gold hitting a bottom in three weeks before rallying a solid 32 percent. The current signal suggests that gold is creating a bottom near the $1,200 mark.
Gold prices hit a one-year low of $1,215.83 on July 19.
The COT Report
The CFTC releases the COT report every Friday. The report that shows the positions that major traders are taking in a number of financial and commodity markets including gold, silver, platinum, aluminum, steel and other commodities. Although no single report or tool can give a trader absolute certainty about where commodity prices are headed in the future, the COT report helps investors see how large traders are positioning themselves.
For instance, a large short interest in the managed money section for a certain commodity might be an indicator that the market is overly pessimistic and saturated with shorts—an indicator that a rally may be coming and that taking a long position might pay off.
One big disadvantage of the COT report is that it’s issued on Friday and contains--up to the latest--Tuesday’s data. In other words, there’s a three-day lag between the report and actual positioning by traders. That’s an eternity in short-term trading thus making it less reliable in that respect.
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There are many ways to read the report, but many traders prefer reading the “Managed Money” section because it gives a good idea of total open interest for a specific commodity. The latest report shows there were 114,944 managed money long gold contracts and 142,100 short ones.
What’s interesting is that both long and short speculative positions increased during the week of 17-24 July, but with short contracts increasing at almost twice the clip for long ones (10,285 vs. 5,284). That’s the kind of pessimism that Baruch is talking about.
Of course, this is not an exact science, but it gives you a good idea of just how the shorts have been piling in thus creating the right conditions for a nice short squeeze.
By Alex Kimani for Safehaven.com
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