It's one thing to hypothesize that a market is in a speculative bubble; it's another to let the data write the story. According to the current Commitment of Traders report, large speculators just set e new net long record of 301,920 contracts. This eclipses their previous record of approximately 266,000 contracts set just this past May. We moved out to a weekly chart in order to provide some context for the current situation.
Two points are abundantly clear. First, this is an unsustainable, speculatively driven bubble. Second, logic rarely applies to speculative bubbles.
The gold rally through the first six months of 2016 has pushed the market roughly 30% higher. Meanwhile, the speculative net position has gone from +19,000 contracts to +300,000 contracts in the same time frame. Furthermore, the speculative total position has gone from around 273,000 to nearly 445,000 contracts. This creates a new speculative total position as well. The point we've been making is that we wonder where new buyers will come from if this trend is to continue. We think the market will run out of new speculative buyers but each new speculative record position proves us wrong.
We base our trading decisions on the collective actions of the commercial traders. They're the ones who pull it from the ground or end up using the commodity in a finished product. Because they're running businesses, rather than speculative trading operations, they tend to come in and buy breaks and sell rallies as their market provides hedging opportunities for their production or consumption needs. Gold miners are selling all of the forward production they can lock in. In fact, gold producers have just set both a net-short record position on top of a record total position. This means that gold miners have never been more sure about their forward pricing prospects than they are at this very moment.
Finally, moving to the chart, you'll notice that we've finally pierced the rough channel we've been in since 2012 and we're nearing its projected top. Once again, irrational markets are no place for price targets and logic so; I'm unwilling to call a price top. However, we feel the best trading opportunity in the gold market will be on the short side and we'll wait for signs of a reversal before jumping in.
Odds are that the market will reverse within the next 30 days, which is less than the free trial period for our discretionary Commitments of Traders nightly email. Sign up and have it delivered to your email box when it finally hits.
