Huge recent imbalances in the gold futures market led many to predict that speculators (usually wrong at big turning points) would be forced to close out their historically extreme short bets. Put another way, too many traders were using gold futures contracts to bet that precious metals will go down, and when those bets are reversed out it will make gold and silver go up.
Last week this prediction started to come true, with gold rising and speculators reacting by closing out a big part of their shorts. The shift displayed below is one of the biggest on record for a single week:
Here’s the same data for gold displayed graphically.
Note how unusual it is for speculators (the gray bars) to be net short and commercials (red bars) to be net long, and how quickly that part of the imbalance was extinguished.
But even after these big changes, speculators are still less long than usual and commercials less short. To restore a normal structure to the paper gold and silver markets, another few weeks of rising prices will probably be necessary — which, yes, precious metals investors deserve. After all the chatter about a short squeeze, it would hugely anticlimactic for this single week’s action to be all there is.
The last time gold speculators went from that short with a huge cover was March 1999...
On that longer-term note, mining stocks have begun to lead the underlying metals, which, according to the Rosen Market Timing Letter, indicates that the precious metals bull market is about to resume.
… both the silver and gold shares have closed above their most recent peak. Could this be a sign of the resumption of the bull market in the precious metals complex? Having started my Wall Street career in the year 1956 this truly Old Timer says, “Yes indeed.” There is nothing new about the precious metal shares moving up before the precious metals. All that is required to know that this is happening is the simplest form of technical analysis. No fundamentals, nothing fancy, no degrees of any kind required in order to see who’s leading who or what’s breaking out first. Just draw a few lines and “Voila” the answer will be yours.
[ZH: but back to the underlying paper gold market, we have the biggest short followed by the biggest buy, based on data going back to 2006 for money manager positioning.
If that short position keeps unwinding -- and the gross short open is still 144,000 contracts -- upward pressure in gold prices should result. When money managers moved to a net long in 2015, prices jumped 30 percent.
A similar move now would see gold above $1,500 an ounce.
As Bloomberg's Eddie van der Walt notes, for a parallel, look at sugar.
After a record net-short position in the commodity in April, money managers turned bullish by Oct. 16. Futures hit an 8-month high last week, having surged about 40% from a decade low in August.]