COT Report: Large Gold Speculators are Giving up on Gold

It’s been a bad year for gold. In fact, it’s so bad that large gold speculators have dialed down their long gold futures exposure to the lowest level in five years. But it doesn’t look like they’ve thrown in the towel quite yet.

After an already dismal year, gold has lost another 11% in the last five weeks.

Is this the last washout sell off before a sustainable rally?

One clue is provided by the Commitment of Traders (COT) report, which tracks the long and short gold futures positions of various types of traders.

Investors basically get a peek at what the ‘smart money’ and ‘dumb money’ is doing.

The chart below plots the SPDR Gold Shares ETF (NYSEArca: GLD) against the long gold positions held by Non-commercial traders. Non-commercials are large speculators.

Even a brief glance at the chart shows that large speculators tend to find themselves on the wrong side of the trade (red and gray vertical lines).

The amount of long gold futures contracts owned by non-commercials has dropped to a five-year low.

The amount of gold tons held in the SPDR Gold ETF and iShares Gold Trust (NYSEArca: IAU) echoes the message of the above chart. The amount of gold held by gold ETFs GLD and IAU has shrunk over 30% since the beginning of the year.

Gold sentiment suggests that the worst of the decline is over. Unfortunately though, gold sentiment alone can be a haphazard indicator.

I always base my gold research on various types of indicators. Sentiment is one of them, technical analysis and seasonality another.

Quite frankly, technical analysis hasn’t produced any good buy/sell signals for gold, GLD, IAU or the UltraShort Gold ProShares (NYSEArca: GLL) recently.

However, gold has very much respected technical support and resistance. The gold chart below was previously published in the Profit Radar Report. The blue dots highlight how well technical support and resistance has worked recently (and for the entire year for that fact).

Near-term resistance is around 1,255. There’s no critical near-term support.

It appears to me that – with or without a bounce – a washout, ‘throw-in the towel’ type sell off is still missing.

We are now starting to gear up for the next long-term trade that may see a 200+ point move.

The long-term analysis for gold featured in the below article provides more details about the next 200+ gold trade.

Long-term Gold Analysis – When’s the Time to Buy Gold?

Simon Maierhofer is the publisher of the Profit Radar ReportThe Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. We are accountable for our work, because we track every recommendation (see track record below).

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Is it Finally Time to Buy Gold?

Ever since the September 2009 all-time high for gold, every gold rally has been a trap for gold enthusiasts. Now, 36% later, we ask the question: Is it finally time to buy gold? The short answer: We are getting closer.

Gold is trading 36% below its 2009 low as every bounce in the last couple of years has turned into a trap.

Is it finally safe to buy gold and gold ETFs like the SPDR Gold Shares (NYSEArca: GLD) and iShares Gold Trust (NYSEArca: IAU)?

That’s a loaded question. The short answer is we’re getting close (IMHO).

Technical Picture Explained

The gold chart (blue dots) below shows that gold prices have respected technical support/resistance levels along with a few other technical nuggets.

The early 2013 Profit Radar Reports highlighted support in the 1,250 range. In fact, when gold was still trading at $1,500 and above, the Profit Radar Report initially expected a major buying opportunity at 1,250 +/-.

By the time gold was closing in on the June low, we realized that there was no obvious bullish RSI divergence at the low (see chart).

Due to support provided by the descending green trend line, the Profit Radar Report still expected a bounce, but didn’t consider it a major buying opportunity.

Ever since, the bearish message of RSI has loomed over every rally and cautioned that new lows are next.

Next support is at 1,165 – 1,155. That’s where we will consider buying gold.

Keep in mind that a consideration is different from a ‘we buy no matter what’ approach.

If trade drops towards 1,165, price action must confirm a three-pronged trigger (three different criteria).  If it passed the test, it’s safe (at least as safe as possible) to buy gold and gold ETFs like GLD and IAU.

The way towards 1,165 – assuming we’ll get there – may not be easy, however.

There are a lot of cross currents over the near-term.

A short-term gold outlook, along with guiding price ‘handrails’ are provided here:

Short-term Gold Analysis

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. We are accountable for our work, because we track every recommendation (see track record below).

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

 

GLD Gold ETF Analysis

So you want to own gold. When is the right time to buy? Should I use gold ETFs to establish (or add to) gold positions? Here is a quick look at a simple but effective strategy to spotting good entry levels for the two biggest gold ETFs.

Are you looking to buy and own gold? Do you want to buy gold at the lowest possible price?

If so, this article is for you.

Holding physical gold, like gold coins or gold bullion, in your hand is a special feeling and comes with certain advantages. If you like physical gold, you may appreciate some of gold’s unique properties:

Gold is very pliable: A single ounce of gold can be stretched into a 5-mile long thread or beaten out into a 300-square foot shoot.

Gold is non-toxic: You may find gold metal flakes (remember it’s pliable) in exotic foods or unusual Swiss liquor. I still have a bottle of GoldSchlager schnapps in my well stocked by under utilized bar.

Gold is considered protection against financial turmoil. What kind of protection? Good question. I guess unless you were looking to buy protection against making money, owning gold in recent years has been little more than an expensive placebo (more on when to buy gold below).

Regardless, many investors want gold to be part of their investment portfolio and feel that gold ETFs are a simple and superior vehicle for owning gold.

There are a number of gold and gold-related ETFs. The two biggest gold ETFs are the SPDR Gold Shares (NYSEArca: GLD) and iShares Gold Trust (NYSEArca: IAU).

Although IAU has a lower annual expense ratio (0.25%), GLD (with its 0.40% expense ratio) has more assets under management. Both ETFs track the price of gold well.

When to Buy Gold

As the gold chart below shows (the chart reflects actual gold prices, not gold ETF prices), gold prices can be quite volatile and buying or selling the precious yellow metal at the wrong time can cause a lot of headache (perhaps that’s where owning physical gold in the form of GoldSchlaeger schnapps helps).

In 2011 gold was caught up in an outright frenzy or bubble.

A couple of weeks before gold topped out in September 2011, I warned via the August 21 and August 24, 2011 edition of the Profit Radar Report:

“I don’t know how much higher gold will spike but I’m pretty sure it will melt down faster than its melting up. At some point investors will have to sell holdings to pay off debt or answer margin calls. The most profitable asset is sold first. Gold has been the best performing asset for a decade and a liquidity crunch could produce sellers en masse.”

Since the 2011 high, there have been some smaller opportunities to buy gold (green dots). All of those opportunities occurred when gold prices found support at the green trend line.

Overall though, buying gold in recent years has been a losing proposition.

I believe that an opportunity to buy gold will soon present itself.

The time to own gold will likely be when the price of gold falls to reach one of the horizontal green price support zones.

I will continue to share my thoughts and forecasts on gold prices and GLD via the Profit Radar Report.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report uses technical analysis, dozens of investor sentiment gauges, seasonal patterns and a healthy portion of common sense to spot low-risk, high probability trades (see track record below).

Follow Simon on Twitter @ iSPYETF or sign up for the iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

 

Short-term Gold Price Analysis

Gold prices continue to defy fundamental analysis, while the gold chart in itself provides a wealth of information. Most notably it provides technical ‘hand rails’ that outline the likely path for gold prices.

Gold prices just can’t get a bit. Fundamental analysts struggle to explain gold’s lackluster performance as central banks (in particular China) continue to gobble up the precious yellow metal.

Here’s a quick look at some support/resistance levels that have guided gold prices – think of them as technical handrails.

Red lines = resistance, green lines = support.

Short-term resistance (red line) was around 1,290 this morning. A move above 1,290 would have been short-term bullish for gold and gold ETFs like the SPDR Gold Shares (NYSEArca: GLD) and iShares Gold Trust (NYSEArca: IAU).

But resistance held and gold prices peeled away before finding support around 1,268.

The chart shows that the margin between support and resistance is shrinking, increasing the odds of a breakout.

A move above 1,290 or so would unlock a target of 1,340 +/-.

A move below 1,265 and 1,250 would suggest new lows.

The charts for the SPDR Gold Shares and iShares Gold Trust look similar.

Regardless of the short-term gyrations, the long-term gold chart suggests new lows and a better buying opportunity are still forthcoming.

A detailed look at the long-term gold chart along with target levels for a new low is available here: GLD Gold ETF Analysis

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report uses technical analysis, dozens of investor sentiment gauges, seasonal patterns and a healthy portion of common sense to spot low-risk, high probability trades (see track record below).

Follow Simon on Twitter @ iSPYETF or sign up for the iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Gold Seasonality Projected This Sell off – What’s Next on the Calendar?

Central banks are buying gold, China is buying gold … and gold prices continue to slide lower. This doesn’t make sense if you’re following fundamental research. Seasonality however projected the recent drop. What’s next based on seasonal patterns?

Like a knocked out boxer, gold prices just can’t ‘get off the mat,’ and smart money gold traders have been selling into every rally.

Weak gold prices persist despite a weak dollar and a strong S&P 500 (NYSEArca: SPY).

Apparently the smart money doesn’t care that China and almost every other central bank in the world is (allegedly) buying gold (this reasoning is flawed anyway, more below).

The best hope for bullish gold investors might be a return of seasonal strength.

Below is a very unique seasonality chart specially created for subscribers of the Profit Radar Report.

It is based on actual gold prices, but can be applied to gold ETFs like the SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and even the Gold Miners ETF (NYSEArca: GDX) and UltraShort Gold ProShares (NYSEArca: GLL).

The gold seasonality chart is created from averaging together 33 years of gold behavior.  But since gold is at a different price level every year, using just the average gold price would inappropriately skew the result by overweighting the years when it was at a higher level and vice versa.

To equally weigh every year, the price history is adjusted (using a divisor) to begin at the same level on the first trading day of every year.  Then each day’s values for the rest of the year reflect the percentage change from that first day of the year.

This chart was originally featured in the September 16 Profit Radar Report and projected a seasonal drop starting on October 10.

Seasonality and particular technical analysis are much better forecasting tools than fundamentals. It’s now obvious: The fundamental reasoning that gold prices must go up because central banks and China are buying doesn’t work.

The Profit Radar Report looks at technical analysis, seasonality and sentiment to identify low-risk buy/sell signals. We sold our gold position (established near the low) at 1,420 on August 27). Wednesday’s Profit Radar Report identified the must hold support level, that once broken should lead to much lower prices.

Here is why this reasoning is flawed: Why The Notion of a Demand Driven Gold Rush is Flawed

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF

Is this Gold Rally Real or ‘Fool’s Gold?’

A novice wouldn’t be able to distinguish fool’s gold from real gold. Even gold experts have trouble telling the difference. Miners have come up with the acid test to avoid getting fooled.

Most metals tend to bubble or fizzle when they come into contact with acid, precious metals don’t. Placing a small drop of a strong acid, such as nitric acid, onto the metals surface quickly and unmistakable differentiates real gold from fool’s gold.

Is this gold rally the real deal or is it a fool’s gold rally?

The results of this analysis won’t be as conclusive as the acid test for gold (nothing ever is in investing), but there are some worthwhile indicators to consider.

CBOE Gold Volatility Index

The April 28, 2013 Profit Radar Report examined a pattern in the CBOE Gold Volatility Index to ascertain if the April low at 1,321 was here to stay.

The CBOE Gold Volatility Index is basically a VIX for gold as the VIX methodology is applied to options on the SPDR Gold Shares (NYSEArca: GLD).

An update chart of GLD plotted against the Gold VIX is shown below. Major gold lows in 2010 and 2011 occurred against positive gold VIX divergences, where gold prices dropped to a new low, but the Gold VIX didn’t.

Such divergences are nothing new. I’ve used similar divergences between the S&P 500 (SNP: ^GSPC) and the VIX (Chicago Options: ^VIX) to nail major stock market lows in March 2009, October 2011, and June 2012. See S&P500 Forecasting History for more details.

There was no such divergence in April 2013 when gold (NYSEArca: IAU) dropped as low as 1,321. This suggested new lows and the April 23 Profit Radar Report stated that: “A new low would be the best buying opportunity.”

We got that new low on June 28, but it didn’t have all the hallmarks of a lasting bottom. We were long for parts of the rally from the June low, but never committed fully.

Our focus was on the iShares Silver Trust (NYSEArca: SLV) where we just closed out a very nice trade. We went long gold again with Thursday’s move above 1,345 (GLD trigger was 130.15).

The move above 1,345 is bullish, but gold has already reached your initial up side target around 1,365 (see resistance lines in chart below).

If gold can move above resistance here, it is likely to extend its rally and move to our second target. Otherwise watch out.

Gold prices have a huge effect on gold miners (NYSEArca: GDX). One unique valuation metric – which correctly predicted the 2001 and 2008 low for mining stocks – just flashed a rare signal. Read more about the Gold Miner’s Signal here: By One Measure Gold Miners Are as Cheap as Ever.

Simon Maierhofer is the publisher of the Profit Radar Report.

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Has Gold Bottomed?

Gold’s second quarter will enter the history books as one of the biggest declines ever. Until yesterday, gold’s third quarter performance has been boring at best. Monday’s one day pop begs the ‘real rally or bull trap’ question.

Gold is special for many reasons. For example, a single ounce of gold can be stretched into a 5-mile long thread or beaten out into a 300-square foot sheet.

Gold is also non-toxic. In fact, you may find gold metal flakes in exotic foods or unusual Swiss liquor. I still have an old bottle of GoldSchlager schnapps in my bar.
This strong gold flake liquor may help drown the pain of this year’s gold performance, but other than that investors don’t care much about gold’s taste or pliability.
Investors buy gold as protection. What kind of protection? That’s a fair question. I guess unless you were looking to buy protection against making money, gold has been little more than an expensive placebo (ask John Paulson).
                                            
When central banks around the world started to quantitatively ease economies out of the ‘Great Recession,’ gold was considered an inflation hedge.
Quantitative easing (or QE) continues, but gold is trading 30% below its 2011 high.
This line of fundamental reasoning doesn’t make sense, but many investors still base their gold buying/selling decisions on a similar rationale.
Yesterday gold saw the biggest one-day spike of the year. Why? Perhaps you can make sense of this, I can’t.
Abe’s (Shinzo Abe, Japanese Prime Minister) party and its coalition partner won a majority of upper house seats in the weekend vote, boosting his opportunities to stimulate the economy.” – San Francisco Chronicle
Nutshell explanation: More easy money will mean higher gold prices.
If plenty of easy money over the last two years coincided with the steepest gold decline in decades, why would it propel prices higher now?
Has Gold Bottomed?
To answer the question that really counts – has gold bottomed? – I rely on technical analysis.
Technical analysis is not always correct (nothing ever is), but it got us out of gold when it traded around 1,800 and to this day I receive thank you e-mails from subscribers.
(Original August 21 and 24, 2011 subscriber update: “I don’t know how much higher gold will spike but I’m pretty sure it will melt down faster than its melting up. At some point investors will have to sell holdings to pay off debt or answer margin calls. The most profitable asset is sold first. Gold has been the best performing asset for a decade and a liquidity crunch could produce sellers en masse.”)
The chart below plots gold prices against the S&P 500. The resulting chart illustrates two key points:
  1. The S&P 500 and gold have been moving in the opposite direction since late 2011.
  2. The basic technical picture for gold.

Here’s what’s worth noting from a gold technical analysis point of view:
  • The June low occurred against green trend line support.
  • Monday’s bounce hoisted prices above resistance at 1,300.
  • Gold is bouncing against next resistance around 1,335.
After gold’s second quarter meltdown prices had to bounce. Until yesterday, it lacked the escape velocity needed to break above resistance (at 1,300), and still another move above 1,335 is needed to unlock higher price targets.
Since there was no bullish RSI divergence at the June low (not shown on chart), I’ve been hesitant to embrace this rally. In fact, I would prefer a new low.
But the market cares little about what I like. So, as per the July 10 Profit Radar Report, I recommended to take partial long positions in the SPDR Gold Shares (NYSEArca: GLD), or iShares Gold Trust (NYSEArca: IAU), and iShares Silver Trust (NYSEArca: SLV).
Thus far the positions have done well and we’ve locked in some profits already and increased our stop-loss to guarantee a winning trade.
Gold (and silver) will have to move higher to validate employing more capital on the long side.

Bullish Euro Gold Breakout May Be Misleading

Gold measured in US dollars has been treading water, but gold measured in euro just staged a bullish technical breakout. While this is good news, there’s reason to be cautious of another ‘shakeout’ move for gold prices.

Investors are forgetful and the market is relentless. The Cypriot Bailout was another reminder about gold’s safe haven advantages over fiat currency.

In times past, gold would have soared on similar economic scares. But not this time. Gold today trades around the same level as two weeks ago.

While the Cypriot Bailout failed to deliver the fuel needed for higher targets, gold could be getting a positive boost from elsewhere.

Gold prices measured in euros just staged a technical breakout above resistance (red circle). Gold measured in US dollars is trading well below similar resistance.

The red lines in the chart below mark previous times where euro-Gold broke above resistance. Euro-gold proved to be the bullish canary every time.

Price divergences between euro and dollar-Gold appear frequent at different degrees. The dotted boxes highlight some of the price divergences at larger turning points. More often than not, the euro pattern (gold colored boxes) sets the stage for the next move.

Based on the correlation between euro-and dollar-gold prices, higher prices seem likely (sentiment is sending the same message).

The question is when?

The Profit Radar Report has been expecting higher prices for gold. However, another new low below 1,555 would look like a more legitimate bottom. That’s why the March 3, update stated that: “Aggressive investors afraid of losing out on a possible up move may go long.”

One reason I would like to see a new low is the lack of an obvious bullish price/RSI divergence at the February 21 low (@1,555). There was a minor divergence, but the bigger the divergence, the bigger the confidence in the longevity of the bottom.

Over the past week gold prices have struggled to move past Fibonacci resistance. The reluctance to move beyond resistance (despite the ‘fear catalyst’ from Cyprus) and the lack of an obvious RSI divergence at the recent low, conflict with the bullish breakout of euro-Gold.

Since I’m always looking for low-risk entry points, buying gold at lower prices would represent a much more attractive risk/reward ratio.

Long gold ETF options include the SPDR Gold Shares (GLD) and iShares Gold Trust (IAU).

Gold vs GDX – Is The Price Divergence Bullish or Bearish?

The precious metals sector is one of the worst performers of the year with gold mining stocks losing three times as much as gold prices. Why did gold miners get hit so hard and can this be bullish going forward?

Gold mining stocks represented by the Market Vectors Gold Miners ETF (GDX) have lost 35% since September last year. Over the same period of time gold prices have shed ‘only’ 13%. Is the GDX decline bullish for gold?

Gold Mining Basics & Disadvantages

Gold mining (and mining in general) is a tough business for several reasons. The mining business is capital intensive. It takes expensive equipment to replace ‘inventory.’

In fact, the goal and business model of every mining company is to sell the most valuable asset on its balance sheet. It’s hard to create consistent value that way.

Unlike brewers (think of your favorite beer) for example, miners don’t get any excess return from branding. It’s not that gold mined by Barrick Gold fetches more than gold mined by Newmont. Gold is gold and commodities are anonymous.

No Progress in the Best Environment Ever

Gold miners have enjoyed the best possible environment for mining and selling gold. Political and financial uncertainty have sent gold prices soaring from $250 to well over $1,500/oz, but Barrick Gold shares trade at their 1996 level today and shares of Newmont Mining (NEM) are at the same level as in 1987.

Barrick Gold and Newmont Mining are well-managed companies. They are industry titans and combined account for over 20% of the Market Vectors Gold Miners ETF (GDX), but … mining just is a tough sector to create shareholder value in.

The first chart illustrates gold miners’ struggle to keep up with gold prices. Newmont Mining is trading below its 1997 peak. Gold prices on the other hand have soared more than 600% since the early 1990s.

Obviously, it is possible to make money with miners. From 1998 (or 2000) – 2011 Newmont Mining shares gained over 460%. However, it took a frenzy drop into the 1998 low and a frenzy rally to the 2011 high to deliver such handsome gains.

Short-Term Gold/GDX Correlation

The second chart below plots the percentage change of gold prices since the September 2011 high against the percentage change of GDX.

Again, GDX has been hit much harder. Gold is down 17%, GDX lost 37%.

Is that performance discrepancy bullish or bearish for gold prices and GDX?

Now is not the time to join the sell gold/GDX crowd. The decline accelerated back on February 10, when the Profit Radar Report predicted that: “A break for gold below 1,663 will result in a move to 1,635, and a drop to at least 1,620 – 1,600 would be welcome to shake out some of the weak bulls.”

Much of the damage has already been done and the recent drop no doubt spooked goldbugs. It also catapulted many fair weather gold ETF investors (SPDR Gold SharesGLD and iShares Gold Trust – IAU) investors back to the sidelines.

I would view a more deliberate test of gold support around 1,530 accompanied by a bullish RSI divergence as a buy signal (with a stop-loss below support).

Gold and Silver Plummet – Why and How Much Lower?

Gold and silver are the de facto “flight to safety” trade. Concerns about inflation (QE4) or the fiscal cliff were supposed to drive precious metal prices higher. This didn’t happen, here’s why:

It’s been a terrible week for gold and silver. Fundamentally precious metals should have rallied following the Fed’s announcement of QE4 (What is QE4?). Here’s the fundamental rationale.

The Fed’s plan to spend an additional $45 billion of freshly printed money (QE Tally – How Much Money is the Fed REALLY Spending?) is supposed to create inflation. In theory, gold and silver are “default inflation hedges”.

Investors trust this theory and put their money where their mouth is. How do we know this? Assets in the most popular gold ETFsSPDR Gold Shares (GLD) and iShares Gold Trust (IAU) – soared to an all-time high.

However, a theory (in this case the theory that QE will lead to higher gold and silver prices) remains only a theory until proven correct.

What Caused the Gold/Silver Mini Meltdown?

Contrary to this theory, the December 16, Profit Radar Report noted that:

“Holdings in gold-backed exchange-traded products reached a record 2,629.3 metric tons. However, all this gold buying hasn’t done much for gold prices. In fact, with so many buyers already committed, there are now fewer buyers out there. Despite seasonal tailwinds, the sentiment picture suggests at least a shakeout sell off.”

For those interested in trading gold, here’s the trade recommendation provided by the same update: “Unfortunately our UltraShort Gold ProShares (GLL) order wasn’t triggered last week. Now aggressive traders may go short gold with a move below 1,690 (around 163.80 for GLD). An approximate buy trigger for GLL (a 2x inverse gold ETF) would be 61.50.”

The corresponding trade setup for silver was as follows (updated chart shown below): “The dashed gray trend lines illustrate past instances where break downs and break outs resulted in low risk entry points. The green support line just below current prices (@32.30 – around 31.20 for SLV) may provide a low-risk entry to go short for aggressive traders. The only available short silver ETF is the 2x inverse UltraShort Silver ProShares (ZSL).” ZSL jumped from 45 to 52.

How Low Will Gold/Silver Fall

I honestly don’t know how much farther gold and silver will fall. However, the two charts below show that both metals reached respective support levels.

No one has ever gone broke taking profits and more often than not, it pays not to get too greedy.

Gold provided a nice 50-point drop and silver declined more than 10% in less than 3 days (nearly 20% for ZSL). We locked in all of our silver profits and half of our gold profits. The remaining half of short gold positions is equipped with a stop-loss that guarantees profits.

Semi-weekly updates and trade setups for gold, silver, the S&P 500, and other asset classes are provided via the Profit Radar Report.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.