When gold’s latest Commitment of Traders (CoT) report was released last Friday, we learned speculators boosted their net-short position in bullion futures and options to the largest level since at least 2006 in the week ended Oct. 9th. During the previous session on October 11th, gold posted the biggest daily rise since the Brexit vote as a surge in safe- haven demand saw managed money speculators begin to cover this extremely large short position.
We will know how much of the speculative short position has been covered, up until October 16th, when the latest CoT report is released later today at 3:30pm EST. Commercial traders, known as the “smart money”, have been net-long for five consecutive weeks, so it remains to be seen if they continue to be net-long until later this afternoon.
Bullion has declined every month since April but appears to be forming a medium-term bottom. Furthermore, even though the U.S. dollar turned higher on the back of hawkish Fed minutes on Wednesday and a weakening euro, gold has remained firm this week. The world’s reserve currency has also formed a bullish inverse head & shoulders bottoming pattern on the daily Cash Settle Index, not unlike both the GDX and the GDX/GLD ratio.
Moreover, safe-haven demand from investors is beginning to firm up bullion and the U.S. dollar in tandem. In fact, the correlation between the greenback and the gold complex has weakened in recent weeks, while investors have begun to flee equities. If this continues, it bodes well for gold stocks and signals both the U.S. dollar and the gold sector are now attracting safe-haven bids. During gold’s brutal six-month selloff into mid-August, the biggest argument from the bear camp was the rise of the U.S. dollar being the main reason for investors selling the gold complex.
However, due mostly to its industrial component, silver continues to lag both gold and its miners while bullion has been bottoming and global equities are correcting. Although both silver and SIL, the Global Silver Miner ETF, has formed an inverse head & shoulders pattern along with the gold complex on the daily chart, the neckline has not been broken on either pattern and both have begun to roll over this week.
Meanwhile, the Gold/Silver ratio has been rising toward 85, which has been strong resistance during this selloff in the complex and if broken, could spell more trouble for the precious metals sector in the near-term. Silver generally leads gold out of major bottoms being made in the precious metals complex and it would be beneficial to the gold sector if this ratio began to head lower.
Additionally, the majority of junior resource stocks continue to be hit with tax-loss selling. Investors have been using most company news releases as liquidity events to dump losing positions, regardless of individual company fundamentals. Although tax-loss sales began early this year, selling generally peaks and the junior sector reaches a seasonal low in mid-December. Nevertheless, I believe each respective quality junior being sold down will bottom independently once the last tax-loss seller has sold, making this is an ideal time to accumulate low-priced positions in good companies for contrarian speculators.
Technically, we had a weekly close in December Gold above $1211 last Friday, so a medium-term bottom may have been struck. However, a close today above $1229 would make a stronger case for a bottom being in place as we head into November. I am expecting increased volatility in the gold sector during the U.S. mid-term elections on November 6th, followed by the next FOMC meeting on November 7 – 8th. Both of these catalysts will take place during strong seasonal bullion buying.
For confirmation of a gold stock long-term bottom being in place, I am still looking for a weekly close above $21 on the GDX. Until we see this, along with participation by most of the junior resource stocks and both silver and its miners outperforming gold in the short-term, I feel there is no need to chase gold stocks. However, beginning to accumulate your favorite juniors on weakness is recommended.
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