Thursday, March 17, 2016

Are We Experiencing A Bull Market In Gold?

I guess many market observers are troubled by the last developments in gold market. After quite a dramatic increase in gold prices many players were expecting a correction or even a return of a bear market. However, at least for the time being, gold stubbornly does not want to go down. Does it mean that the end of a bear market in gold should be announced? Let me discuss this matter.

Firstly, please look at the chart below:

The chart shows that a full-blown bull market in gold is indicated by the decreasing gold / silver ratio (which means that gold was relatively stronger than silver). While this multiple is not a good indicator in identifying the beginning of a bull market, during its full-blown phase this ratio is definitely going down (look at the areas in yellow). 

Since middle 2011 the gold / silver ratio has been trending up, which was an indication of a full-blown bear market in precious metals sector.  

Now, look at another chart. This time the chart shows the action of big speculators in gold futures (COT Report), starting from 2005:

In the upper part of the chart you can spot four areas in yellow, blue, red and green colors:
  • The yellow color shows a period of a full-blown bull market in gold - speculators were holding larger and larger long positions in gold
  • The blue area indicates a period when a bull market in gold was fading - speculators, despite gold prices going higher, were not willing to take more risk and their long positions were not going up or even started to go down
  • The red color indicates a bear market in gold - speculators were unloading their long positions in gold futures 
  • The green color is a period of a fading bear market - speculators seem to be accumulating gold (their long positions sometimes go up, sometimes go down) 
Summarizing - now we are in the green cycle. In my opinion it is a tricky period - a full-blown bull market has not started yet but there are many indications that there is a chance that a bear market is exhausted or even finished.

What is more, although currently the so-called Managed Money (another term for big speculators, as, for example, hedge funds) holds one of the largest net long position (127,427 contracts) in the history of the current bear market, it does not necessarily mean that a large correction is coming. Note that the current high readings relate to the bear market in gold. During a bull market phase Managed Money was holding much bigger net long positions (around 240,000 contracts): 


  1. Great chart on the meaning of COT positions. Lots of people are looking for a big correction because of the spec COT position. Your chart shows much larger positions have been part of bull markets. What about commercial positions over a bull and bear market? Thanks

    1. Commercials hold more or less inverted position (against big spec). Currently the reading is minus (i.e. short position) 195.4 thousand contracts. During bull market extremes their position was around minus 300 thousand contracts

  2. So we are nowhere near the top

    1. I would say we are nowhere near the top using a full-blown bull market metric. But, in my opinion, now we are not in a full-blown bull market in gold so the only thing which is guaranteed is high volatility.