Regular readers of SpreadBet Magazine and our blog will know that we switched our stance on gold to bullish earlier in the summer. Fortuitously for us, this also coincided with the near term bottom in the market. Since the end of June, the precious metal has been in fairly solid recovery mode and is up just over 10% off the lows. In our Titan Precious Metals we have, as they say in the industry “had it off”.
The chart above shows the daily price action in gold since spring this year. Mid-April’s collapse was followed by an attempted recovery, once the daily RSI plunged below 30 (a classic sign a market is oversold). Although this read of RSI provided a fairly decent trading opportunity to go long, the subsequent move higher failed and by the end of June gold had fallen to $1,200/oz and the daily RSI was once again below 30. This was when we started buying aggressively.
So far things are looking good for our trade. Although the 100 and 200 day moving averages will need to be captured decisively before we can say with certainty that the cyclical bear market is over, we were pleased to see the price pass its first major technical text when it broke through the 50MA (the green line above) this week. Further tests are still to come, with obvious resistance likely at the 100MA (the grey line above) and the previous reversal zones of $1,400-1,405/oz and $1,460-$1,470/oz. The latter two zones marked the points at which May’s attempted recoveries and consolidations failed, so from a price perspective they look significant.
Although these obstacles are fast approaching, the fact that we are already over 10% off the lows means that ifthe resistance points are met then gold will be 15-20% above its trough. By this stage the moving averages should have turned (or at least have started to turn) positive. Of course, for this to happen, it is entirely dependent on how long a rally takes to pan out, but a solid month and a half of rising prices is already having a noticeable effect. The 50MA has clearly started to flatten and if the recent trend continues, it won’t be long before this begins to move up again. In other words, assuming this rally continues, once gold hits the first of our resistance targets, momentum should be behind the metal. And as we all know, momentum invariably attracts larger players, whose friend is the trend.
It is far too early to say we are in a new raging bull market, but there has been another interesting development in the last few days, which adds to the argument that this rally in gold is built on an increasingly firm foundation. It appears that a sizeable short squeeze has just taken place. The chart below reveals the largest collapse in shorts since 1999:-
Last week gold shorts covered 23,518 futures contracts, which is the equivalent of 2.352million ounces of gold. Although net shorts remain extremely elevated, this sudden move suggests something powerful is currently happening in the market. Such a move can only have been driven by major players. If this short covering has continued this week then we can expect an intermediate change in the outlook for gold. After all the “smart money” changes its position once it can see limited further profit in its current position. Once it has finished being short, it makes simple sense it will then seek to go long. This is the natural order of things!
Thankfully though, as contrarians, we were able to position ourselves ahead of this action, when it became clear that too much “smart money” was crowded into the short side of the trade. This is the way we like to trade at Titan – ahead of the pack and with solid fundamental research & technical backing.
Consequently, we now find ourselves well positioned ahead of this exciting time for gold, as upward momentum really starts to take hold of this target. For further details on our Titan funds, click below.
R Jennings, CFA. Titan Investment Partners.