This is my first article for Sprott Money—the first of many, I hope—and I am thrilled to be able to say that I believe we are on the cusp of a significant rally.
The positioning of the Money Managers, or “Funds”, in the Gold futures market is at extremes that have typically led to massive rallies in Gold. They are usually net long, but as you can see from the table below, when their net long position is sufficiently low, it tends to lead to significant rallies in the price of Gold.
Well, at 39k contracts on Tuesday last, this was one of their lowest net long positions since Jan 2017. It clearly indicates a high probability of a significant rally from here (and given the drop in price since then, they are likely even less long, perhaps even net short). We could see a rally of anywhere from 7% to 13% based on prior rallies. At the close of 1288 on Tues, this would mean a rally to somewhere between 1378 to 1455. Sounds good right? But we don’t have to rely on positioning alone for such a forecast.
Sentiment is a great tool to gauge the direction of all markets, but it works especially well in Gold and Silver markets. It is also primarily a contrarian tool. By that I mean: when everyone is bullish, that is typically the best time to sell, and when everyone is bearish, the best time to buy. My preferred tool in this regard is the Daily Sentiment Index or “DSI”. It was the primary tool that enabled me to call the peaks and troughs in Gold over the past few years. It is showing extreme bearishness in Gold right now.
The DSI measures sentiment on a scale from 0 to 100, with anything below 20 indicating extreme bearish sentiment and anything above 80 indicating extreme bullish sentiment. As of Tuesday, it was showing one of its lowest readings since the bottom in Dec 2015—extremely bearish, similar to levels seen at the lows in the table above. This is counter-intuitively bullish for Gold and matches what positioning is telling us.
Technically, Gold is also oversold, with an RSI of 33. It is also displaying a positive divergence on its MACD Histogram, which is showing a higher low compared to the lower low in price. This can indicate a pending reversal of trend. Fibonacci supports levels are at 1288 and 1270, 61.8% and 76.4% of the rally from 1238 to 1369. We also have a daily trendline support level at 1270, and there is weekly trendline support below at 1245 also
Gold also has a strong correlation with the Dollar Index. The DXY (or “Dixie” as its known) tends to move inversely to Gold. It has staged a strong rally off its low in Feb but is extreme overbought now with an RSI >70. It was also negatively divergent on its RSI and both MACDs at a higher high in price today. This does not mean it has peaked, but it does indicate that at least a short-term top is close. A move lower in the DXY would also support a rally in Gold.
The only caveat is that Large Speculators, or Funds, remain significantly short the dollar, long euros, and over the last 20 years, the DXY has seldom hit a peak in price under such conditions. But this time could indeed be different.
In summary, based on positioning, sentiment, technicals, inter-market analysis, Elliott Wave Theory and similar readings prior to previous rallies, Gold is at or close to a low here that is likely to set off a rally to 1360 or higher in the coming weeks. 1270 is strong support. Ideally, I would like to see a positively divergent lower low in price below 1288 with a higher RSI, DSI, and/or MACDs to confirm the low is in place for the next big rally to begin.