The positioning of participants in the gold and silver futures market at COMEX is very encouraging at this point. The Commitment of Traders Report provides a weekly update on futures positions of large technical traders, commercials and small traders. Their positions at the close of trading on Tuesday March 17th 2015 point to a meaningful rally, at least in the short run, in both gold and silver.
How can we know? It is very simple, in fact. The indicator we are watching is the rate of change of short positions of commercials. We have pulled up the gold COT chart to make that point (courtesy of Sharelynx, annotations are ours). The price rallies in gold are indicated with the green dotted lines (see upper pane on the chart); they have come with a meaningful change in short positions by commercials as indicated by the blue bars (see second pane). When looking at that, the key is to focus on the rate of change because it determines the stopping power of a rally. When short positions are being accumulated at a high pace, compared to previous instances, there is a higher probability that the rally will be short lived.
At present, the commercials hold a very low amount of short positions. Compare their short positions today, i.e. the last blue bar on the second pane, with similar positions in the past. Mind how those positions have coincided with at least short term bottoms, in several instances even mid-term bottoms.
In that respect, Ted Butler had an interesting quote in his weekend newsletter to paid subscribers. It appeared in Ed Steer’s newsletter:
“I suppose it’s possible for the commercials to slam on the price brakes at any time, but usually there is a cycle and season to price capping that evolves over time periods longer than a few days or weeks. And in order to lure the technical funds back onto the short side the commercials would have to rig a sudden and violent drop in the price of silver below recent lows and even if the commercials did rig such a price drop (this is still a manipulated market after all), it probably wouldn’t lure near enough technical funds back to the short side as existed as of Tuesday. The technical funds are much more comfortable in building big short positions on salami slicing-like price declines, rather than on big chunks to the downside—and for a variety of reasons, including expecting it for many years, I’m inclined to view this budding rally in silver as the big one.”
Having analyzed the gold and silver futures market structure, Ted Butler sees the potential for a significant price rally, even “the” big one. Our personal belief remains that 2015 will be a year in which the metals will be consolidating, which implies that rallies should not exceed the $1400-$1450 range in gold and $22 in silver. But we would be very surprised if we would see a trend change, and the start of a new leg in gold’s bull market. As we have iterated time and time again, each price evolution should be watched closely along with key indicators to get an understanding of the strength of rallies and declines.