Precious Metals Break Upward But Key Traders Remain Short

Precious Metals Break Upward But Key Traders Remain Short

Gold and silver are enjoying a good last week of the year with price movement back upward — and above a significant downtrend line. One technical analyst professional who follows this market says this move may be interesting, but bulls should not get too excited just yet.

Tom McClellan is the editor of the McClellan Market Report and notes that certain larger traders are holding on to their short positions — those large traders known as “commercials” in the Commitment of Traders weekly report issued by the Commodity Futures Trading Commission (CFTC).

Typically, commercials are industry-related people such as those who run actual mining companies — it’s believed their closeness to the market provides them with good insight into conditions. So, if they remain net short, as the latest report suggests, that means these knowledgeable traders probably expect lower prices.

Here’s how Tom describes it in his latest report, “This week’s chart is one that features prominently in that lineup, especially in recent months. The commercial traders have moved collectively to a big net short position. A lot of the commercial traders in the gold futures market are gold mining companies, using the futures market to fix a price for their future production. 

So when they move to a big net short position as a group like this, it is a pretty strong statement that the people who are in the gold business think this is a good price at which to sell. 

One important point to understand about the COT data for gold is that the commercials have long been biased to the short side. Since 2001, there has only been one time that they have actually gone to a net long position as a group, and that was in late 2018, when gold was making a pretty important bottom. 

The rest of the time, they have been net short to varying degrees, and so the game consists of evaluating their net position relative to their recent range. Even on that basis, their current big net short position is a pretty compelling message that gold prices are too high at the moment, and that an appropriate adjustment is coming.” 

You can read more of Tom McClellan’s work on his Twitter feed or on his highly informative website.

Here’s the chart of daily gold price:

You can see that the price this week made it back above that downtrend line that’s been in place since late August/early September. To those short this market, that gap area from mid-June might be a potential target.

Here’s the point-and-figure look:

You can how gold seems to have found a low in 2015/2016 and has tracked upward since then.

Here’s the chart of daily silver price:

This type of action confirms the break above the downtrend line seen on the gold chart. The precious metals tend to trade together and here you can see how similar it is.

Here’s the point-and-figure look:

It’s taken silver longer to form a bottom — there’s that one low in 2015 and then it took until 2019 to find it again.

Seasonality for precious metals is typically decent for the month of January, but maybe this year will be different if the “commercials” are staying short.

I do not hold positions in these investments. No recommendations are made one way or the other.  If you’re an investor, you’d want to look much deeper into each of these situations. You can lose money trading or investing in stocks and other instruments. Always do your own independent research, due diligence and seek professional advice from a licensed investment advisor.

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