In July we saw massive surges in the price of gold and silver with many small cap mining stocks simply soaring. You saw that in Aftermath Silver and in my top stock pick for this month of August last week too. But the rise in gold above $2000 has brought with it a bit of a stall in price momentum towards the end of last week as some people are calling for a price peak and others are simply worried about a big decline to come.
Incredibly last week’s commitment of traders report, which breaks down the activity of small speculators and big money commercial producers and hedgers inside the futures market every week, shows that in the latest report more small speculators opened up new short positions to try to bet against gold than they did new long positions. In the minds of the small players in the market it is time to short gold evidently – a wildly risky move to make.
Here is a snapshot of the most recent COT report from Goldseek.com. The action in the giant commercials I think shows what is most likely to happen with the gold trend over the next few weeks as they tend to represent the big “smart” money. It shows that they have a much a different view than the small players do on the gold trend right now.
Notice that the commercials closed out BOTH long and short positions last week while both large and small speculators opened up more. This suggests that in the minds of the commercials they aren’t seeing giant downside price action from here or upside either. While most traders are getting extremely emotional over gold, silver, and mining stocks they are not.
They are in other words expecting a mere pause in the trend of gold. This is my view too and would end up amounting to a move similar to what we saw in May and June or in the first half of July for gold, silver, and mining stocks before their last big rally.
Gold last consolidated in July below $1830 an ounce. From May to June it also consolidated with $1750 as resistance and $1670 as support. The commercial trades in the futures market suggest that a similar period of tight range bound consolidation is likely for gold (and silver for that matter) for the next few weeks below $2100. The gold price went up and down within a 5% range in those previous two consolidation periods. A similar range would put gold’s next support level in the $1950-1975 area if it were to go through $2000.
A period of consolidation for a few weeks in gold is not something to panic about. It would match my view of what is likely to happen with a now oversold US dollar index. Obviously the commercial traders are not in panic as they are closing hedges still in the futures market. The simplest interpretation is they are trading less and stepping back. For those that missed the gold run since March this may end up being the last chance to get in at around the $2000 level there ever will be again.
I own gold, silver, and mining stocks and have no intention of trying to jump out and buy back in at a lower level, because a few percent of downside risk isn’t enough for me to want to attempt that and the overall trend is still up. That means the surprises are to the upside in the best mining stocks still even in a time of sideways consolidation for the metals.
-Mike
