The gold market is poised for a short-term reversal.
Gold has been on a terrific run since it bottomed at about $1,050 per ounce in December. The metal rallied to close at more than $1,270 per ounce last week. That’s a gain of more than 20% in just three months.
Gold stocks have done even better recently. The Market Vectors Gold Miners Fund (GDX) is up around 55% since mid-January.[ad#Google Adsense 336×280-IA]But all rallies eventually end. And it looks like the next few weeks could be rough for the “gold bugs”…
Back in November, I showed Growth Stock Wire readers that the commercial traders were getting bullish on gold.
The development was a strong sign that gold’s decline was nearing an end and a rally was coming.
You see… commercial traders are the so-called “smart money.” They’re merchants, miners, explorers, or bankers in the gold business.
They use futures contracts to hedge their exposure to gold and protect themselves from adverse downside moves.
Each week, the Commitments of Traders (COT) report shows the long or short positions of the largest commercial gold traders.
The short position in gold is almost always a positive number – meaning that commercial traders are usually short the metal. That makes sense since most commercial short positions are hedges against future declines in price.
For example, if a major gold producer wants to lock in a guaranteed price on its production, it will short the metal in the futures market – thereby hedging its bet.
When gold is trading at a relatively low level and commercial traders expect it to be higher in the near future, the COT short interest often drops to less than 50,000 contracts. When gold hit its low of about $1,050 per ounce in December, the commercial traders’ net short interest was just 7,000 contracts.
That was the lowest level of short interest in about 14 years. And it just about marked the bottom of the gold market.
But the situation has changed. The COT report published last Friday – reflecting positions as of last Tuesday – showed that commercial traders are now net short 195,000 contracts.
That’s the highest level of short interest in more than three years.
The smart money is turning bearish on gold – at least for the short term. So we’re probably close to seeing a meaningful pullback in the metal.
If you paid attention to the commercial traders in December, you likely have earned solid profits in gold and gold stocks over the past few months.
If you’re paying attention to the commercial traders now, it’s time to trim some of those profits and hold off on any new purchases in the gold sector for the next few weeks.
Best regards and good trading,
Source: Growth Stock Wire