This year’s recovery in precious metals prices – and the sudden spike in gold/silver mining stocks – convinced a lot of people that a new bull market had begun. Last week’s brutal smack-down scared the hell out of many of the same folks.

The latest commitment of traders (COT) report implies that we should all relax. Things are playing out pretty much according to a script that’s been in place for decades — and which points to happy times by early next year.

The quick and dirty COT story is that it’s a snapshot of what the big players in gold/silver futures contracts are up to. There are two main groups in this market: the commercials (mostly big banks and companies that buy metal to turn it into coins, jewelry and industrial products) and speculators who bet on price moves. The former consistently fool the latter into guessing wrong at turning points. That is, the speculators are usually way long at the top and very short at the bottom. So you can tell where prices are headed over next the six or so months by looking at what the speculators are betting on and assuming that if they’re excited, they’re wrong. The following chart illustrates the point. Ignore everything here except the red line, which represents the speculators. When it’s way up, they’re very long and prices are about to fall, and vice versa.

This year they’ve gone record long, which explains the fast recovery in metals prices and mining stocks: The speculators were piling in. This of course sets the stage for an eventual correction. So what happened last week was to be expected (though it was several months overdue, illustrating the point that the COT report is great for direction but dangerously unreliable for timing).

So now that we know why the beat-down is happening, let’s see what this indicator says about when (in very general terms) it might end. Here are the weekly COT reports for gold and silver through last Tuesday, courtesy of our good friends at GoldSeek:

Note that the speculators are cutting their long positions while the commercials are scaling back their shorts. Here’s the same data expressed in percentages:

The key conclusions:

– Both groups are moving in the right direction to establish a precious metals bottom. That is, if they keep this up, eventually the commercials will be long and the speculators short, setting up a situation where the speculators will be forced to close their shorts by buying gold/silver, thus sending their prices up.

– The commercials are moving a little more aggressively than the speculators to close out their positions. Not sure that that means.

– Neither group had done all that much as of Tuesday the 4th, which implies that the bottom is not yet in sight.

– Based on the brutality of the final three trading days of last week, next week’s COT report will probably show a much bigger move in the right direction — that is, the speculators will be a lot less long. So on Friday the 14th (when Tuesday the 11th’s results are reported) we’ll have a better sense of how close that bottom is.

– The carnage in bullion and mining shares represents a great buying opportunity because eventually these paper games will stop working. The fundamental environment – negative interest rates, massive government deficits, steady increases in private sector debt, incipient banking/credit crises everywhere you look – is phenomenally good for real assets like gold and silver. So who knows? This might be the last chance to get in before the phase change.

By John Rubino

dollarcollapse.com

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Only logged in users are allowed to post comments. Register/ Log in

The Market Oracle is a FREE Financial Markets Forecasting & Analysis web-site.
(c) 2005-2024 MarketOracle.co.uk (Market Oracle Ltd) - Market Oracle Ltd asserts copyright on all articles authored by our editorial team and all comments posted. Any and all information provided within the web-site, is for general information purposes only and Market Oracle Ltd do not warrant the accuracy, timeliness or suitability of any information provided on this site. nor is or shall be deemed to constitute, financial or any other advice or recommendation by us. and are also not meant to be investment advice or solicitation or recommendation to establish market positions. We do not give investment advice and our comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to enter into a market position either stock, option, futures contract, bonds, commodity or any other financial instrument at any time. We recommend that independent professional advice is obtained before you make any investment or trading decisions. By using this site you agree to this sites Terms of Use. From time to time we promote or endorse certain products / services that we believe are worthy of your time and attention. In return for that endorsement and only in the cases where you purchase directly though us may we be compensated by the producers of those products.