We'll start with the Commitment of Traders (COT) Report. One of the more reliable indicators for the short- to medium-term direction of gold and silver, and indeed any commodity, is to see what position traders are taking on Commodities Futures Exchange (the world's largest exchange) in New York.
Traders are divided into three categories: commercials, large traders and small speculators. The simplified wisdom is that the large traders are the ones who get it wrong, while the commercial traders are the ones who get it right.
The commercials are often hedging miners' future gold production, and will often be short (betting the market will fall), while the large traders tend to be on the long side (betting the market will rise). The trading strategy is as follows: the more open interest – i.e. open positions – the more likely it is we are near a top; the less open interest, the more likely it is we are near a bottom. The more the large traders are long, the more likely the top, the less the commercials are short, the more likely the bottom.
Below is a weekly chart of gold for the last five years with, underneath, the positions taken by traders on the Comex. You can see that at the moment, the commercials have dramatically cut their short positions and the large traders their long positions to levels where significant market bottoms have previously taken place. The arrows I've drawn show previous bottoms and the corresponding positions of the traders.
The set-up for silver is even more bullish. In fact, it's as bullish it's been for five years or more.
Remember the COT Report is just one indicator and, as we have seen over the last few weeks, pretty much anything can happen in markets. The larger trend in silver is very much down from the highs of last spring, but the shorter-term picture for the next few months looks very bullish. I believe a rally to $14 or even $17 is very much on the cards.
We have also seen some very nice moves in some of the silver companies such as Silver Wheaton (NYSE:SLW) and First Majestic (TSE:FR) with some of them up almost 100% from their lows of last week, which bodes well.
It's also the time of year to buy precious metals
Seasonally, October is a time to sell gold and this year was no exception. But late October, early November is a good time to buy back, as you will usually get some kind of rally into the year end and often into Spring. The chart below from Nick Laird at ShareLynx (a site, by the way, which has some superb charts) shows the seasonal tendencies:
Since 2007, gold and silver have outperformed gold and silver stocks. In other words, you'd have been better off owning the metal. But the ratio of the metals to the miners has reached extreme levels. In fact, the most extreme levels since 2000-01, at the very bottom of the market. This extremity suggests we could be entering a period when stocks will outperform the metals.
Keener readers will remember a fortnight ago that I reported that we are close to a sell signal in gold and silver, according to the strategy I outlined here: How to make money from markets you know nothing about. However, often when you get such a signal, it's a good idea to wait for the chart rise back to its 52-week moving average and then review the situation (it doesn't always happen, of course). In this case, this would mean a return to silver at around $15.50 and gold at $870. I'm confident we'll get there before too long.
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