Our trading is focused on the thesis; “No one knows the value of his markets like those who pull it from the ground.” While individual companies or operations may be prone to mismanagement or other bad decisions, the collective actions of the companies within a given sector are rarely wrong. The tug of war between those who pull it from the ground versus those who process it determines true price discovery within the commodity markets. These are the elephants bulldozing the macro moves while the speculators compete for the remnants with the dung beetles. Recently, large speculators have been stocking up on gold futures at a record pace and the gold miners are selling all the forward production they can lock in above $1,220 an ounce. This could lead to quite the washout as speculators are forced to take losses under $1,280.
Looking at the chart below, we’ll start with the bottom pane and work our way back to the top to end on a technical note. The bottom pane of the chart plots the net positions of the large speculators and the commercial traders. This clearly illustrates the speculative buying we’ve seen throughout the consolidation above $1,220 per ounce. Conversely, commercial traders have been consistent sellers as they lock in profit margins between their cost of production and the elevated futures prices. It’s important to note that the reason these groups build such divergent positions is that the miners are simply running a business model while the speculators are trying to determine actions by our FOMC, the Brexit vote, technical levels and anything else that could lead to an emotional, knee jerk, gold bug rally. History has proven that speculators depending on event driven outcomes rarely prevail.
The next pane higher shows the MACD of the net commercial position. We use the commercial traders’ collective momentum to determine which side of the market we should be trading from. We always side with the commercial traders, as their sense of value is what determines a swing trading, mean reversion methodology. Therefore, you can see that when commercial momentum is positive we are only looking for buy signals and when commercial momentum is negative, we are only looking for sell signals.
The momentum trigger in the second pane is exactly what it says. When looking for buy signals, like at the December lows or the buy signal we sent May31st, we let the tension build between the two trading groups. As the market is sold off in the face of commercial buying, we wait for a reversal higher to buy in and join the commercial traders’ positive outlook. Conversely, when the gold miners have the upper hand, as they currently do, we look for sell signals in expectations of declining prices falling back towards the value area which we’ll see via the inception of processor purchases.
The commercial traders have been exceptional at calling the gold market’s important turning points. Their current position is growing more bearish by the week.
One final note of enforcement of the current COT sell signal. We also track the total position size of the market’s participants. The speculative total position is also near record size while the total commercial trader position just over half its record. This illustrates the precarious position of the speculative traders ahead of Thursday’s “Brexit” referendum. There really aren’t any speculators left to buy the market and considering that commercial traders are only mid-level on their total position, we see miners as being more than willing to squash any post-Brexit pop. Odds favor the shorts with today’s technically weak outside bar lower providing just one more clue.
Courtesy: Andy Waldock
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