Here is our weekly review of the positions of the large traders in gold and silver based on the weekly Commitment of Traders Report. It is the core of the short term price setting. Read our Crash Course In Short Term Gold & Silver Price Forecasting to gain insights in the basics, and the previous updates at the bottom of this article. The source of the information in this article: the weekly Standard Bank Research report.
Because the conditions in the precious metals market are really at extreme levels, it is worth spending more analysis than the previous weeks.
The net speculative length (long minus short positions of speculators) has recently reached extremes. Total speculative short positions are extremely high and the net length (long minus short) in the speculative segment of the futures positions remains extremely low
The net speculative length (long minus short positions of speculators) as a percentage of total open interest (all open futures positions) remains at bullish levels. This picture has not changed in the last 2 months. We initially wrote that a value below 19% is bullish, but that a price rally can lag in time. We also wrote that a high open interest is not favorable to price rallies. It is very likely that the combination of both factors explains why the gold price is not going up for the time being.
For now these figures are favorable for gold holding its major support level at the lower end of the $ 1,500. But as we all know, extremes tend to get more extreme before the trend reverses, so more downward pressure is likely if we would wait too long for a price rally.
Silver has a similar outtake as gold, but the picture is magnified. The net speculative length (long minus short positions of speculators) is at an even more extreme level than gold. Total speculative short positions are at never seen highs and the net length (long minus short) in the speculative segment of the futures positions stands at a lower reading than in 2008 (right before the big ral
The net speculative length (long minus short positions of speculators) as a percentage of total open interest (all open futures positions) as a standalone figure shows bullish readings, but as we have noticed in the past weeks the open interest is an important attention point. Now the open interest has risen fast the last weeks (especially last week) that it has reached 5 year highs. Speculators are known for covering their shorts very fast, but for it to happen we need to see higher prices on a short notice. If that were not to occur, than lower prices are in the cards.
The metals look at least due for a bounce. The levels are so extreme that they need to recover. If a price rally would soon occur, it is very important to monitor what the evolution would be of the speculative length and the open interest for metals.
To put the high readings in open interest into perspective, especially in silver, readers should look at the red line and compare the amounts with the black line (the 5-year average). That really can drag on the price of silver. But again, a reversal can be sharp once the price reverses. There is a lot of tension in the metals, especially silver.
Gold Silver Worlds | April 8, 2013