Does the trend change in the short position of commerical traders
signal a bottom for precious metals?
Gold and silver posted a strong start to the year in 2017, despite
the December rate hike. This was a repeat of last year, when the December
2015 Federal Reserve rate hike was followed by a massive rally in precious
metals. However, both gold and silver have pulled back sharply over the past
few weeks. Gold is down $60 or 4.5% to $1,200, while silver is down $1.40 or
7.5% to $17 per ounce.
The gold price chart shows the symmetrical triangle, most often a
continuation pattern for technical analysts. This suggests a continuation of
the prior uptrend in place since late 2015. There is support around $1,180
and the 50-day and 100-day moving averages have converged at $1,212. A close
above this price point would be very bullish for gold. The RSI has a bit more
room to drop as trader’s await the FED’s decision.
The silver chart shows a similar pattern with room to continue lower
before hitting trend-line support. However, the RSI is very close to
overbought, so it is unlikely that silver will continue much lower. Silver
has strong support at $16, but I doubt the price will drop that low or stay
there long if it does.
This correction has been driven primarily by increasing expectations of
another rate hike coming out of the March 15 FED meeting. We will find out
Wednesday if they decide to raise interest rates again. I think a hike of 25
basis points is largely priced into the market at this point. Even if gold
and silver slip lower on a hike, I think the downside will be limited. We are
more likely to get another price rally as investors that sold the rumor,
cover and buy the news.
Speaking of covering short positions, commercial traders reduced their
short positions on both gold and silver last week. The latest commitment of
traders (COT) report for March 10th shows slight reductions in short
positions on both metals, breaking a multi-week trend of increasing short
positions. This trend change often signals a bottom or exhaustion of the
price correction in precious metals. Notice the blue arrows on the chart
reversing the prior trend of increasing short positions by commercial
traders.
Also, it is worth noting that the silver short position by the commercials
was the largest in history last month. If these shorts are forced to cover
this substantial short position against silver, it could cause a short
squeeze and massive spike in the price ahead.
We reduced our exposure to mining stocks over the past few months and have
plenty of power dry to buy this dip. Once the bottoming pattern is confirmed,
it will be time to back up the truck and buy the dip aggressively. You can
follow which stocks we hold in the GSB model portfolio,
receive trade alerts when we are buying or selling, get the monthly
contrarian newsletter and profit alongside us by clicking the subscribe
button below. You can get started for just $45 and pay around $1 per day
for the annual subscription.
