- Hedge funds have bet heavily against a rise in the prices of gold and silver.
- We could be on the verge of a rapid move up in gold and silver.
- Silver appears to be transitioning into a bull market.
In an interview today, I spoke with Equity Management Academy CEO Patrick MontesDeOca about a special weekend report for the Variable Changing Price Momentum Indicator (VC PMI) Early Bird Weekly Update he was issuing.
Looking at the July 26 commitment of traders report, it appears that hedge funds have bet heavily against a rise in the price of gold.
“Gold and silver hedge funds have the least exposed position to the gold market since 2016,” MontesDeOca said. “We are seeing one of the largest negative correlations ever. All the other times that they were this extreme, the gold market bounced substantially.”
Looking at the 24-year chart, the commercials for gold and silver have reduced their short positions substantially. It appears that the central bank short strategy risk has been transferred to the spec hedge funds in the gold and silver markets.
Contrarian Delight Part 2: Hedge Funds in Very Rare Net Short Total Gold Holdings Position
The past few months have added some cred to the “sell in May and go away” rule of thumb for precious metals, as gold’s price action has been both boring and depressing. It’s now close to its 12-month low, while a lot of miners are providing material for the old joke: “Want to make a small fortune in gold mining stocks? Start with a large fortune…”
But, to paraphrase one more aphorism, the cure for low prices is … low prices. The further gold falls, the more pessimistic futures speculators become, to the point that they’re now close to being net short, something that hardly ever happens. On the following chart the speculators are represented by the silver bars and “commercial” traders (who tend to be right at big turning points) are red. Both groups are trending towards the “neutral” mid-point of the chart, which in the past has proceeded big up moves in gold’s price.
Meanwhile, seasonality continues its slow but steady march out of the summer doldrums and towards what is usually a much stronger winter and spring. The following chart shows what happened towards the end of each of the past five years, as Chinese and Indians loaded up on gold for Spring/Summer wedding gifts and as savings for post-harvest cash. There’s no reason to expect them behave differently next time around.