Conflicting Evidence for the Gold Correction

In a nut shell, the metal looks like the correction needs more time while the gold stocks are saying they may be done.

We had a bear market in gold from 2013 to the end of 2015. The end of a bear market in gold miners has historically been followed by 26 to 30 week rallies recording 50% to 200% gains. The 2016 rally lasted 29 weeks and posted a 150% advance in the senior stock indices (GDX, HUI and XAU)…just about perfect.

It is now eight weeks since the GDX, HUI and XAU topped. This corrective phase generally results in a downside break of 25% or more in a five to 11-week time frame. Once again, just about perfect. The RSI(14) helps in identifying the interim lows; when it drops below 30, which happened last Friday, the low is usually in. We should therefore look for basing action to start now with a retracement rally of up to 50% of the decline from the September 2nd high. We could then see a pullback and a subsequent further rally through that resistance, putting the miners in a position to take out the highs of the year.

For gold itself, the key issue, as I mentioned in my last post, is the large speculative long position which needs to be cut down to size through liquidation. This is occurring but likely still has a ways to go.

The latest Commitments of Traders data released last Friday covers up to the close of trading on Tuesday, October 4, 2016. The data tells us that Large Speculators held a net long position of 245,508 contracts at that time, down an impressive 46,396 contracts from the week before but still rather high. The net position undoubtedly fell some more during the rest of last week but my guess is that we probably have at least another 50,000 contracts to go. The Small Speculators are also far too long for a turn upward. What this further liquidation means in terms of price and time no one knows but it could be done by the end of the month.

Gold COT Report – Futures
Large Speculators Commercial Total
Long Short Spreading Long Short Long Short
324,136 78,628 53,866 111,864 383,106 489,866 515,600

Change from Prior Reporting Period

-34,836 11,560 5,941 -11,292 -54,644 -40,187 -37,143

Traders

177 110 84 48 56 270 208
 
  Small Speculators      
  Long Short Open Interest    
  54,958 29,224 544,824    
  1,850 -1,194 -38,337    
  non reportable positions Change from the previous reporting period

Time to hurry up and wait, I think.