Gold’s Precarious Support

The gold market has simply been stagnant for more than a year now. Prices may be higher year to date but virtually any gold traded at $1,300 per ounce over the last year has seen both sides of the ledger. The trading pattern that’s developing continues to consolidate. The tighter this consolidation becomes, the more explosive its breakout should be. This week’s piece will be short because this is one of those instances when a picture really is worth a thousand words.

The price range of this continuing consolidation is now down to $50 and volatility continues to decline. The real key here is, “Which way is the gold market going to breakout?” The commercial traders have had a fantastic year and a half forecasting the next move in the price of gold. You’ll notice on the included chart that recently, they’ve nailed every major high and low. Commercial traders turned bearish on this market in late June, which is why we expected that rally to be a false breakout in gold and silver.  As you can also see on the chart, commercial traders have sold around 100,000 contracts mostly around $1,300 per ounce over the last two months. This turned their momentum negative and is strong enough to keep it that way.

gold futures consolidation
Commercial trader buy and sell signals bound by market consolidation.

The issues facing the gold market are too confounding and fluid to quantify. Gold as a safe haven has just as many factors in its favor as it does against it. Inflationary concerns from a healthy US economy coupled with the removal of the Federal Reserve Board’s Quantitative Easing programs makes even the domestic pricing of gold a challenge. When safe haven currencies are thrown into the mix due to global geopolitical unrest, divining even the proper exchange rate can be a challenge, let alone pricing the underlying commodities themselves.

Our view all along follows the, “fair value is the last traded price,” mentality. Therefore, following the commercial traders allows us to see where the players within an industry are putting their money to work. The most successful operations in the world owe a big part of their success to the ability to hedge their future supply and demand needs through the commodity markets. The recent actions of the net commercial trader position clearly shows that gold miners are the ones actively seeking the use of the futures market to get their future production sold near our current levels. Since we don’t own any gold mines ourselves, we’ll take the actions of those who do as a proxy for our own.

Watch for rallies to sell in the gold futures market as the market prepares to penetrate the support of the lower trend lines. Currently, anyone long the gold market should be watching the $1,285 area. The setup for all of our commitment of traders’ signals (COTSignals) follows the same three-step process. First, we only take trades inline with the commercial traders’ momentum, sell signals in the current case of gold. Secondly, we wait for a speculative driven counter move like the June-July rally. Finally, when the market starts to swing back inline with the commercial traders’ momentum, we enter our trade and use the newly established swing as our protective stop point.


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