Gold is Being Set-up for Another Spanking

Gold has been behaving as if interest rates are about to be cut, which is the opposite of what the CME FED tool is predicting; zero probability of a rate cut, and 12% chance of a quarter-point hike in March.

This disconnect may be because of the fear trade arising from the equity market’s stumble, but since we do not think that the equities are going into a full-blown bear, we calculate the probability of the next $50 move in gold to be down. In the unlikely event that there IS a rate cut, the fact that gold has already priced one in, means that gold would not react much to it (sell the news).

Now let’s look at some historical reasons for our negative position on gold.

Notice in the chart below, that the RSI has started to move down and the HUI and GLD have backed-off their recent highs and are heading down toward the blue trend lines. We expect to have gold back to at least $1180.

The first chart below is of the positions held by gold traders on the COMEX: dark red bars represent the positions of the large commercial banks and dealers who are generally short (and correct): the grey bars represent the large speculators (usually wrong): and the short yellow bars represent the small speculators (also usually wrong). Notice how at the moment, the commercials are short a lot of gold, and the speculators are long a similar amount.

Under the COMEX chart, is a chart of the gold price over the same time interval. Notice how the commercial traders are maximally short at the peaks of the gold price (blue arrows), and both large and small speculators are maximally long at the same time.

What follows is a drop in the gold price which allows the commercials to cover their short positions at a profit, while at the same time the speculators are forced to sell their long positions at a loss. The historic probabilities are on the side of a drop in the gold price over the next few weeks.

Again, these are probabilities, not prophecies.

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Forty years of private equity trading, and still learning.

Forty years of private equity trading, and still learning.