Market Report: Gold Breaks Oversold Records - Research

At last, a short-term bottom for gold and silver seems to be forming. This week saw a sharp bounce from record oversold levels, followed by a mid-week pause.

In early European trade this morning (Friday), gold was up a net $4 from last Friday’s close, at $1190, but on Thursday last week it sold down to $1160. So, while there is little change on a Friday to Friday basis, it has actually rallied $30 from the low point. Silver has underperformed, being down a net 18c at $14.62 this morning, having seen its recent low at $14.34.

As our introductory chart shows, the recovery so far has been relatively muted, except perhaps for the $30 bounce in gold. On this basis alone, one might argue that there is no reason to trust it. But that is to ignore the remarkable oversold condition of the market, and that therefore a technical bounce of significant proportions is on the cards. The next chart is of the managed money category of speculators (hedge funds) on Comex, showing their net positions.

The chart is truly remarkable, showing this category of speculator was net short a record 83,324 contracts on Tuesday 14 August, the date of the last COT release. But bear in mind that gold fell sharply further on Wednesday and Thursday morning, so it is possible that by the time it bounced the net short position approached 100,000 contracts.

This is an enormous skew in the wrong direction for futures, with the long-term average, shown by the pecked line, at 63,000 contracts long. This bizarre situation is bound to correct in gold’s favour. All that’s needed is a let-up in the pace of bullishness for the dollar.

That indeed is the issue. Futures statistics for all the quoted metals and currencies show hedge funds have shorted virtually everything on a net basis to go long of the dollar. And as experience should tell us, when everyone is on the same side of the trade, a major reversal almost usually follows.

Now for silver. Under cover of a strong dollar, someone, yet to be revealed, is accumulating massive quantities of physical metal. Metal stored in Comex is at a record 290 million ounces. The next chart is of the hedge fund position, showing how short they are into this record physical accumulation.

The oversold condition is perhaps not as extreme as in gold futures, which can be explained by the fact that a speculating hedge fund more naturally shorts gold to buy the dollar. Nonetheless, at 22, 291 net short (111,455,000 ounces) it is huge for a relatively illiquid market.

Furthermore, there has been an extraordinary divergence between the silver price and open interest, as our last chart illustrates.

Open interest hit a new record this week on Tuesday, while the price has been declining. Normally, OI increases with the price, correlating as this chart mostly shows. Coincidently, the COT figures, due to be released later tonight, are for last Tuesday, so we can expect to see some interesting numbers for the managed money category.

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