We have seen a very substantial increase in the Commercialís short positions in gold over the past week, as shown on the gold COT chart below. Given that, in this writerís experience at least, the Commercials are virtually never wrong, and therefore the Large Specs, whose long positions have ballooned over the past week, are virtually never right, it looks likely that gold will react soon, despite its breakout from the large triangle that dates back to early December. However, it is important to note that any such reaction, even if it drops gold back into the pattern of the triangle, will not invalidate the bullish implications of the breakout, but rather will be regarded as throwing up a buying opportunity for those who have not yet established long positions. This will be especially true for the large gold stocks, which have become short-term overbought following the strong run of the past couple of weeks.
On the gold chart the ballooning of the Commercialsí short positions and the Large Specs long positions over the past week is obvious, and we should remember that the COTs tally is made on Tuesdays, so the count could actually be higher by the end of the week. These figures call for a reappraisal of the shorter-term gold chart to search for signs of a short-term peak. Sure enough, further scrutiny of the 1-year gold chart shown here reveals that gold has hit the projected top line of a channel that started life embedded within the triangle. In addition, various short-term oscillaters, such as the RSI shown on this chart, are close to critically overbought levels. The conclusion is obvious, a short-term reaction is in all probability in the pipeline, a view greatly bolstered by the all-important COT figures.
The silver COT chart shown here is much more benign. Silver is in any case nowhere near as overbought as gold. This chart shows that the Commercialsí short position actually fell slightly over the past week, although the open interest level remains rather high, impeding the chances of a significant rally in the short-term. Given the immediate outlook for gold it is therefore logical to expect silver to back off short-term in tune with a reaction by gold, and any such retreat would provide an opportunity for the open interest level to drop back.
In conclusion gold looks set to react near-term, perhaps after a week or so of choppy action near the current peak. The reaction will probably drop the price back to the area of its 200-day moving average, perhaps a little lower. This should be an important buying opportunity, for gold itself, but especially for the strong large gold stocks such as Goldcorp and Glamis Gold, and for Streettracks, which are currently substantially overbought short-term. Silver and silver stocks will likely react in sympathy with gold and gold stocks, but not by so much, as they are not so overbought short-term, and the COT position for silver is nowhere near as negative short-term.
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