Short Term, the Trend in Gold is Likely Down

Short Term, the Trend in Gold is Likely Down

Gold and the gold shares have been heading down. Our guess is that we have another week or so to go before the market signals a buy.

COMEX is only one market but the positioning tells the tale. In the January 30 COT report, Open Interest was 438,279. In the February 13 report, it was 393,232, down 10.3% in two weeks. The large speculator long position fell from 238,407 to 199,036, a 16.6% drop in the same two weeks. The net large speculator position (after deducting shorts) declined to 167,640 contracts from 188,925, down 11.3%. So, to keep it simple, the hedge funds are liquidating, probably because they now think that Greece and the Ukraine are not going to push the world into chaos by tomorrow afternoon.

The net large spec position probably needs to drop another 45,000 contracts or so to around 120,000, in our opinion. Some of that would have happened in the last three days after the February 13 report cut-off so maybe we are half way to finished. Maybe another week. Meanwhile, China is going on holiday next week (until the 25th) which means a further shakeout appears likely.

Two of our favorite signals have been flashing a warning the past few days (see below). High yield debt is now outperforming quality corporates, meaning risk appetite is back, which is never a gold positive. And bank stocks are outperforming broader equities, another negative for gold.

Are the hedge funds right to be dumping? Only for a very short term trade. Greece and the Ukraine are part of a bigger picture of rising risks and waning confidence in the system that is preparing the way for the next move up in gold.