Commercial Gold Traders Appear To Be Losing Their Grip

For years the best trading strategy in gold and silver has been to buy when the ‘net short’ position of commercial traders was low, and sell when the numbers were high.

This chart courtesy Cotpricecharts.com shows commercial gold traders are ‘net short’ (purple bars) 207,000 contracts in the futures market. Last week the number was 208,000 and this was the largest number since December 2012.If we compare this chart to the gold chart just below this chart, we will see that in the past there was almost always a correlation between a large increase in the ‘net short’ position in the COT chart,and a top in the price of gold. 

This chart courtesy Stockcharts.com shows the price of gold as a dotted line, along with the ‘net short’ position in blocks.Notice failure on the part of commercial traders (so far at least), to bring the gold price down to where they would like to cover their short positions, as they have done so many times in the past.  In May the ‘net short’ position at the COMEX was 132,000 and over the next two months gold fell 129.00.In October the ‘net short’ position had risen to 166,000 and during the next two months gold dropped by 130.00.This time the ‘net short’ position is the highest since December 2012, but the commercials have only been able to cause gold to drop by 50.00.

In this analysis we are drawing the assumption that gold has found support at the $1220 level and is ready to rise from here, notwithstanding the large number of ‘net short’ positions put on by commercial traders. 

We draw this conclusion from the performance of gold and silver mining stocks.

This chart courtesy Stockcharts.com shows the HUI index of gold and silver producers is breaking out from a bullish ‘cup with handle’ formation (blue arrow).The purple arrow points to a ‘bear trap’ that ignited the January rally in mining stocks.The green arrow points to the breakout with a target at 255 (in stair-stop fashion).The supporting indicators (RSI and CCI) are positive, and the 50DMA is in positive alignment to the 200DMA, while both are trending higher!In a bull market we expect mining stocks to lead the way, and HERE WE ARE!