This rare Gold setup usually leads to large rallies
Recently the Yen has perked up
against the dollar, something that makes gold bugs often sit up and
take notice. Yen and gold have enjoyed a cozy relationship this year – the
correlation between the 5-day rate of change in Yen futures and the 5-day rate
of change in gold futures is .6 over the past six months (out of a scale of -1
to +1). That’s quite high and unlikely to occur by chance.
Further supporting a potential new leg up in precious metals
can be found in the positions of large speculators in gold and silver futures.
While this data is getting somewhat stale (new data comes out this afternoon),
what we can clearly see from the chart below is that trend-following speculators
had greatly reduced their long positions in the past few weeks.
The chart below shows the percentage of long contracts held by
large speculators in gold and silver. Large speculators are those that hold
more than 200 contracts of gold futures or 150 contracts of silver futures as of
the reporting date, and that don’t identify themselves as using the futures
markets to hedge their day-to-day business risk. Typically we’re talking about
trend-following Commodity Trading Advisors.
We can see from the chart that recently these large specs were
holding a little more than 30% of long gold futures and under 30% of long silver
futures — both about equal to multi-year lows. The previous two times both
percentages had reached such low levels, the PHLX Gold / Silver Index
(
XAU |
Quote |
Chart |
News |
PowerRating)
enjoyed a multi-month run higher. Perhaps the same will be in store this time
around if the XAU can bust out of the triangle formation that it has been
forming since the spring.
Jason Goepfert
Jason Goepfert is the founder of Sundial Capital
Research, Inc. and Editor of sentimenTrader.com, a leading website for the unique and practical
application of behavioral trading to the stock and bond markets. The site has
subscribers in all 50 states and more than 50 foreign countries, including
individual investors, portfolio managers and market strategists, and has been
widely cited in international financial media.