Monday, January 1, 2018

My Lack Of 2018 Predictions Of Gold / Silver Prices

2017 has just ended so it is a good time to make predictions for 2018. However, the problem is that I do not make predictions - I have no crystal ball and no idea what will happen this year. The only thing I can do reliably is to look at the current state of a few financial markets and discuss the patterns they present.
Let me apply this approach to the gold and silver markets. As usually, I am going to use the data delivered by the Commitments of Traders reports 

From the contrarian perspective silver looks very attractive. For example, Money Managers, big speculators trading silver futures, hold a net short position (the red circle):

Source: Simple Digressions and the COT data

Last time they were that pessimistic about silver was July 2017 (the blue circle). At that time Money Managers were also holding a net short position in silver futures. Then, over the next two months the prices of silver went from $15.6 to $18.2 per ounce (an increase of 16.7%).

Another example – the ratio defined as:
Gross short position held by Money Managers / gross long position held by Money Managers

Now the ratio stands at 1.14 which means that the majority of speculators are betting on lower prices of silver:

                           Source: Simple Digressions and the COT data
In the past, when the ratio was in the area marked in yellow, silver presented an excellent medium-term (up to six months) buying opportunity. As the chart shows, the ratio is once again in that area.


Although gold looks less attractive than silver (from the contrarian perspective), it is still a buying opportunity. My self-invented gold sentiment index is below 40%. In most cases such a low reading indicates pessimism among big speculators trading gold futures (but it is not excessive pessimism):

                                    Source: Simple Digressions

And pessimism is what the contrarian speculators look for. Note that at the end of 2015, when gold was bottoming, the index was standing at 0% (everybody was busy in predicting lower prices of gold) indicating an excellent buying opportunity. Then a bull market in gold started.

Now, during bull market cycles the best buying opportunities are when the index is flashing low readings…but not necessarily very low ones (as, for example, 0%). As the chart above shows, the readings of around 20% – 40% are sufficient to expect a bottom. Now the index is flashing 35.2% so, despite a recent rally, gold looks still attractive for the buyers. However, due to the fact that gold prices are close to their strong resistance level (the area marked in yellow on the chart below) a near-term correction is likely:




No comments:

Post a Comment