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How Strong Will The Next Precious Metals Rally Be?

Sprout Money's picture




 

gold trading COMEX

Exactly one week ago, gold was trading close to its multi-year low and a lot of observers were convinced that gold was ready to collapse to $1,000 per oz in a similar fashion as it did in April and June of 2013.

However, gold has repeatedly misguided investors in the past and it did so once again. A rally has started in the precious metals complex, namely, triggered by the Fed's announcement that it would not raise interest rates in the short term.

The rally looks constructive so far. Chart-wise there is plenty of upside, evidenced by the RSI reading in the 50ish area (upper pane) and a rising MACD (lowest pane).

1

Gold has been hovering between the $1,280 – $1,320 area for almost two years now. The long-term consolidation pattern is a constructive development, as it will function as a solid foundation for a new rally.

However, all of this does not give any additional insight into the strength of the new rally that started last week. What indicator provides reliable information to that end?

The Indicator

Our empirical evidence shows that the weekly Commitment of Traders (COT) report provides the best clues, in particular the evolution of the short positions of commercial traders.As readers probably know, the COT reports highlight the futures positions of large speculators, small speculators and commercials in the COMEX gold and silver futures market.

We often get the feedback from readers that gold and silver prices are manipulated because of the COMEX, so why analyze futures positions?

While it is true that the futures market is the epicenter of manipulation, it also provides clues for the direction of the prices of precious metals, because it reveals the positions of ‘da boyz’, so why not use those insights?

To that end, the key is to follow the movement of the short positions of commercials. In particular, it is the rate of change in accumulation of short positions that mostly determines the duration and strength of a rally. The opposite is true as well: the rate of change of the reduction of commercial shorts provides clues about the duration of the price decline.

The latest Commitment of Traders Report for futures positions held at the close of trading on Tuesday March 17th 2015 is shown below (courtesy of Sharelynx, annotations on the chart are ours). The chart contains week-on-week data since April 2012.

As readers can easily observe, the four substantial price rallies in the last three years are indicated with the green dotted line on the upper pane.

Note what happened with the short positions of commercial traders in each of those four instances: the blue bars on the second pane grew very fast. The faster the accumulation of shorts compared to prior rallies, the higher the probability that the rally will be short-lived.

That pattern has become pretty clear since June 2013. Look at the intermediate tops (marked by 1, 2 and 3) and the rate of change of commercial short positions during each rally. The rallies have been consistently shorter, while commercials bought faster and more short positions during each rally.

2

The opposite is true as well here. During the big price decline from October 2012 till June 2013, commercials were slow in covering their short positions. On the other hand, mainly after the intermediate tops 2 and 3 (see chart above), the short covering process went very fast. That pattern is even more outspoken since the last intermediate peak at the end of January.

Based on the data we can conclude that the current setup in gold is truly perfect, and it points to a meaningful rally, at least in the short term.

The Setup

In other words, the ongoing cycle of selling seems behind us and a new short-term cycle should have started last week. Whether this rally will be short-lived or not depends on how fast commercials will buy shorts compared to previous rallies.

A similar view on the Commitment of Traders report in silver paints a less bullish picture. As seen on the next chart, the reduction of commercial shorts in the last month was impressive, but in absolute terms the short positions are not at an extreme low. When compared to previous intermediate bottoms, this is a good setup but not THE perfect setup (not as good as in gold).

Let's zoom in on the below chart. Note how each rally since June 2013 (annotations 1, 2, 3 and 4) has been sold each time in a more aggressive way. Commercial shorts added more shorts with each rally, and they did so faster. That is reflected in the shorter duration of each subsequent rally.

3

Although the absolute number of commercial shorts does not stand at an extreme low, there is certainly the possibility of a substantial rally. Again, the setup is good but not perfect. It is the change during the rally that will determine its strength and duration.

Mind that there is a major divergence on the chart, and we are not sure at this point what that means, although we have an interesting working assumption. The open interest has been steadily rising; it currently is close to its all-time high of 2008 (not visible on the chart).

Rising open interest in an uptrend pushes the price higher. Rising open interest in a downtrend, as seen on the chart above by the green bars until June 2013, pushes prices lower.

What is interesting is that, at this time, more and more effort is needed (rising open interest) to push the price lower, with a diminishing effect on the silver price itself. We have a strong feeling that this points to selling exhaustion, which if correct, would set the scene for a trend change.

The Conclusion

The perfect setup in gold combined with a good setup in silver, along with the U.S. dollar seemingly entering a cooling-off period, points to a short-term rally in metals. This has also been confirmed in the price action of mining companies.

 

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Fri, 03/27/2015 - 16:42 | 5935203 Jungle Jim
Jungle Jim's picture

All I know is, gold price is down a good bit (more than $20) from where it was Wednesday night. And it is forecast to go down some more Monday and Tuesday. I don't care where it's going to be in 15 years.

Fri, 03/27/2015 - 19:05 | 5935692 meterman
meterman's picture

Yes you do.

Sat, 03/28/2015 - 23:31 | 5938516 Ctrl_P
Ctrl_P's picture

Actually, no.

The price of real food and trade for single malt.

Fri, 03/27/2015 - 14:50 | 5934773 meterman
meterman's picture

Just more pie-in-the-sky Gold and Silver BS from the chorus of sirens that sing the Precious Metal Song. Decide on the amount of your loss suckers and when, if ever, spot regains your target number - SELL - SELL - SELL. My loss target is 25%. What is yours?   

Fri, 03/27/2015 - 19:35 | 5935782 Rock and Hard Space
Rock and Hard Space's picture

Keep looking at PMs in the context of fiat, and you would be right.

Look at them through the eyes of our fiat being declared worthless, or worth-less, to our suppliers.

China and India, as well as many other "state's" are telling their people to buy PMs.

We would be well advised to remove our hubris-colored glasses and do the same.

Or not.  All I know is my silver has value way beyond what the criminal bankster syndicate says it is worth

Fri, 03/27/2015 - 16:46 | 5935214 outamyeffinway
outamyeffinway's picture

Whatever happens you'll all be wrong.

Fri, 03/27/2015 - 13:40 | 5934436 Joebloinvestor
Joebloinvestor's picture

I'll believe it when it happens and not before.

I expect to wake up and see a jump in price in the hundreds at some point.

Fri, 03/27/2015 - 14:21 | 5934604 tocointhephrase
tocointhephrase's picture

Ok..Thank you for your opinion on the movement of silver. Now where do you see the price increases in gold?

Fri, 03/27/2015 - 14:52 | 5934780 Joebloinvestor
Joebloinvestor's picture

I don't forsee a big movement in the price of gold until Barry leaves office, or the dollar collapses.

Fri, 03/27/2015 - 13:30 | 5934396 vincent
vincent's picture

Positioning your child or heir apparent for the inevitible upward move, and thinking in those terms has helped me sleep much better. Not being in an underwater position has also helped.

Should we be proven correct sooner rather than later...well, all the better. I'd like some fine hookers and blow.

Plenty of things to do while we patiently wait. Every day is Thanksgiving.

Peace

Fri, 03/27/2015 - 13:28 | 5934385 exartizo
exartizo's picture

wrong.

historical data provides ABSOLUTELY NO INDICATOR OF FUTURE PERFORMANCE.

There.

Fixed it for ya.

Fri, 03/27/2015 - 13:49 | 5934465 markettime
markettime's picture

How long have we been looking at charts of the COT and hearing the next bull market is going to happen tomorrow? Just my opinion but I  am thinking it is going to take something real drastic outisde of the paper market to get this thing rolling again. 

Fri, 03/27/2015 - 14:23 | 5934615 daveO
Fri, 03/27/2015 - 12:00 | 5933948 UP4Liberty
UP4Liberty's picture

The fraudsters will do everything they can to demonize gold and silver.  The goal is to eliminate the masses ability to acquire WEALTH.  Digital currency is already here.  We are so badly f***ked.  That being said, I will never accept FIAT currency as a legitimate form of currency.  It is unsound, unwise and most of all, IMMORAL.  I'm stacking FOREVER.  F**K THE FED.

Fri, 03/27/2015 - 15:25 | 5934895 crusty curmudgeon
crusty curmudgeon's picture

"The goal is to eliminate the masses ability to acquire WEALTH."

It is not the only goal. 

Those who are sophisticated enough to recognize the advantages of using a "legitimate form of currency" (and to object to the unconstitutional currency printing we have had since the war between the states) are also sophisticated enough to appreciate that the price of precious metals are manipulated significantly.

So if you want to use legitimate money, how do you do so?  How do you determine the value of all of the myriad goods and services in terms of gold and silver?  Anyone stacking PMs is unlikely to part with them at the official spot prices. 

In other words, one important goal is to prevent people from using real money.  Though I suspect, if you can get enough people on board, a free market "fudge factor" on the actual exchange rate of gold and silver would develop.

The way forward is to get a state to do this (with Utah's law, this would be a good place to start).  The state could require taxes by large corporations to be paid in gold.  Then they could allow people to be paid in gold by the state (e.g., tax refund).  This would create a large enough market in real money to make a difference. 

For now, you can start with your tribe.  If you don't have one, then perhaps that's where to start.

Fri, 03/27/2015 - 15:17 | 5934891 hungrydweller
hungrydweller's picture

"The fraudsters will do everything they can to demonize gold and silver."

 

While they continue to accumulate themselves.  Stack accordingly.

Fri, 03/27/2015 - 11:36 | 5933873 Dexter Morgan
Dexter Morgan's picture

Until TPTB change they can make silver 35 cents if they want to.  Doesn't mean I'm selling my stack.

Fri, 03/27/2015 - 12:23 | 5934039 Bastiat
Bastiat's picture

How long can they deliver?  That's the question.

Fri, 03/27/2015 - 11:05 | 5933756 SuperRay
SuperRay's picture

Blah blah blah. That's what I'm hearing...

Fri, 03/27/2015 - 11:01 | 5933742 FieldingMellish
FieldingMellish's picture

To the moon! Where have I heard that before? Oh yeah... JUST ABOUT EVERY SINGLE ZH ARTICLE ON GOLD! Give it a rest, Sprout.

Fri, 03/27/2015 - 10:59 | 5933732 Fun Facts
Fun Facts's picture

"How Strong Will The Next Precious Metals Rally Be?"

So strong ?

Fri, 03/27/2015 - 11:58 | 5933941 Bananamerican
Bananamerican's picture

I'm going with "incredibly strong"......by, uh, "the third quarter"

Fri, 03/27/2015 - 10:51 | 5933713 lordbyroniv
lordbyroniv's picture

BIG BANG 2015.75,.......................BITCHEZ !!!!!11111111

Fri, 03/27/2015 - 10:03 | 5933486 TheReplacement
TheReplacement's picture

Would those be green Sprouts?

It is ironic that Sprout says buy gold and Sprott says buy food (Brussel sprouts?).

Fri, 03/27/2015 - 11:02 | 5933736 Urban Roman
Urban Roman's picture

Sprott, Sprout ... there has to be some poetry in there somewhere.

... I got nothin'

 

Charts, COT reports, blah blah blah. ... in relation to the 'paper' currencies, it will fluctuate at the whims of the 'market'. Just as rigged as the other 'markets'.

But mostly it is interesting as a sort of barter tokens for when-if the paper currencies fail. Also, as buried treasure from the former back yards of metalbugs, at some future date.

Fri, 03/27/2015 - 12:32 | 5934080 maskone909
maskone909's picture

YOU ARE ABOUT TO HEAR A TREMENDOUS INTERVIEW.....

Fri, 03/27/2015 - 13:16 | 5934298 Urban Roman
Urban Roman's picture

:p

 

... And fluct you too, Yanqui!

Fri, 03/27/2015 - 13:30 | 5934395 maskone909
maskone909's picture

is that Borat?

OH THE BABY! 

whats wrong, did retard escape?

why the long face pussy cat?

Fri, 03/27/2015 - 14:43 | 5934740 messymerry
messymerry's picture

I got knocked on my Sprott

a big purple bruise Sprouted

through my lycra it grew

and now I've been outed...

Silver and Gold will have their day when the next Lehman event erupts...and not before.

;-D

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