Each week, the commitment of traders (COT) report gives a snapshot of activity in the futures markets. When it comes to gold, the COT unsurprisingly showed a huge drop in the speculative long positions on gold as prices fell more than $60 per ounce on the week.
Although this may seem like a devastating blow to this year's rally in the precious metals, logic dictates that this sharp movement likely will precede another jump higher for the gold market.
The alternative news website Dollar Collapse explains, "the speculators are usually way long at the top and very short at the bottom. So you can tell where prices are headed over next the six or so months by looking at what the speculators are betting on and assuming that if they’re excited, they’re wrong."
The point here is that speculators are almost invariably behind the curve when trying to gauge the medium-term movement of prices (for gold or otherwise). After all, they are speculating on futures contracts, so an overly exuberant reaction to the current news seems risky at minimum.
It seems reasonable to claim that traders are overshooting the mark. There is the distinct possibility that even a modest recovery in gold prices will force a great deal of short-covering, driving another rally in gold anew. Dollar Collapse also makes a pair of prescient observations: 1) that the bottom could be close for gold, creating a "great buying opportunity"; and 2) the more intense the downward swing right now, the more likely the recovery will be equally swift and intense.
For the time being, nonetheless, the precious metals are well below their recent highs. Gold futures fell below their 200-day moving average for the first time since February. The 200-DMA is considered a strong technical indicator for whether a market is rising or falling.
Moreover, the various exchange-traded funds (ETFs) that are related to gold have been worth watching. The Market Vectors Gold Miners ETF (GDX) has seen massive trading volumes since the drop in gold prices began, ranging from 40 million to 200 million trades per day. Interestingly enough, however, the SPDR Gold Trust ETF (GLD) has hardly seen its bullion stockpile budge, with only modest outflows.
Perhaps the most encouraging sign for a rebound in gold prices is the notion that the bottom is in. For instance, Goldman Sachs has advised buying gold if it hits the $1,250/oz mark, as this could be the only chance to buy at these depressed price levels. Analysts at Goldman believe that any sell-off would be stanched by the surge in physical demand for the yellow metal by investors who likewise see the drop in prices as a golden buying opportunity.
This is partly because, despite the recent downward action, the fundamentals that have led to stronger gold prices haven't changed. Concerns about weak global growth and the ineffectiveness of monetary policy have hardly abated, and gold stands to enjoy safe haven demand as long as these factors remain in place.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.