Gold: COT Report Flashes Yellow Flag

Gold was unable to rally above $1,300 per ounce. It briefly traded above $1,300 last week, but pulled back earlier this week, and is sharply lower today with a loss of -2.5%. Silver was down 7% to $16.80 at a certain point during the session, platinum fell by 3.5% and palladium by 3.2%.

The sell off was slightly predictable based on the evolution of the latest COT reports. Let us explain this statement based on below chart.

The positions of large traders in COMEX gold and silver, as reported by the Commitment of Traders report (COT), has changed quickly in the last couple of weeks. The chart below shows the current positions of commercials and non-commercial traders with the blue and red bars (center of the chart). Those are the key participants in COMEX. As readers can see, the key takeaway of the report is the pace of change of the short positions of commercials during each price rally, as marked by the red rectangles. The faster the commercials accumulate short positions during a price rally, the higher the chance that the rally will be short-lived.

gold_COT_28_january_2015

 

The change of the commercial shorts relative to the gold price rally of the last couple of weeks has been remarkable. Commercial shorts are at the highest level since February 2013. Their stopping power has become clear in today’s price decline. As we noted earlier today, the price of gold should hold above $1,250 to counterbalance the sell off. If gold were to fall below that level, it would not bode well for the metals in the short and intermediate term.

Chart courtesy: Goldchartsrus.

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