Two weeks ago we wrote an introduction in how to read the short term gold and silver prices forecasts. It happens too often that people listen to what others are thinking, telling, writing. But the really important information to analyze is the positions of the big players that are moving the markets. It is all about knowing what they know. Investors should monitor the future positions of the institutional investors and enter a market only when they see a low risk / high reward setup. It requires discipline, which includes a full control of emotions.
In the article, we explained in a simple way the data you should look at, and what they mean. We focused on the open interest (an indicator of the participation rate), the net speculative length (the long minus the short speculators), the net speculative length and as a percentage of open interest. We wrote the following:
Another important indicator is the number of net speculators: it shows the long minus the short speculators. When the net speculators amount to approximately 40% it implies a sell off is likely. As a rule of thumb, net speculators under 19% implies a full buy signal; it indicates low risk/high reward.
The latest COT reports which are processed by Standard Bank Research on a weekly basis show that one of those key indicators has a very bullish set up since the past week. The following chart shows how the indicator has fallen below 19%, to a level rarely seen since the 2008 crash. The key message for gold: we have high reward / low risk setup based on the positions of the largest investors that move the price short and mid-term.
Standard Bank Research wrote in their latest report: “A massive 97.1 tonnes of net speculative length was lost.”
Over to silver: the picture looks good, but not as strong as gold. This is still in line with our expectations described in our article two weeks ago. It is clear on the chart how fast positions can change, from almost overbought to close to oversold in a matter of weeks.
The aforementioned indicators should be compared with the 5-year average. Those figures are provided in the weekly report of Standard Bank. We picked out the open interest chart which shows that silver has a high open interest on a 5-year average basis while gold stands somehow at an average. The evolution should be monitored closely, but does not change the bullish picture especially in gold.
Please note two a couple of things. First, the figures show the situation until Tuesday; the sell offs on Wednesday and Thursday are not included, and one can expect that the picture will seem similar or even better at the end of past week. Second, positions can change quickly, so close monitoring of the evolution is mandatory. Third, all of the above should not impact your PHYSICAL gold holdings.
Courtesy of K. Xeroudakis, Precious Metals Strategist who contributed to this article.
Follow the gold and silver price evolution week on week. Read the previous updates.