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  • Top trader: This 14-year extreme means higher gold prices are likely




    The year-end rally in gold kicked off on Friday.

    Last month, I told you commercial traders were getting bullish on gold. Their net short position in the metal had fallen to just 24,000 contracts. That’s one of the lowest readings of the past few years. Similar readings have often signaled that the price of gold was near a bottom and gearing up for a rally.

    Gold continued to fall. But commercial traders continued to reduce their net short position. The Commitment of Traders report that was released last Friday (which includes data up to December 1) showed that commercial traders were net short just 7,000 contracts. That’s the lowest reading of the past 14 years.

    That same day, gold jumped $25 per ounce. But there are more gains ahead…

    Take a look at this updated chart of the price of gold…

    The action in gold over the past six weeks is nearly identical to what happened in June and July. Gold traded sharply lower in June and July. Then it spent a couple of weeks hammering out a bottom while the moving average convergence divergence (MACD) momentum indicator slowly turned higher off of oversold conditions.

    That’s when commercial traders started to get bullish on the metal… At the end of July, they were net short only 14,000 contracts.

    Those were the conditions that kicked off a solid short-term rally in the metal. Gold bottomed in early August at less than $1,080 per ounce – two days before the August jobs report. Three weeks later, gold had rallied nearly $85. It was trading for about $1,165 per ounce. That’s a gain of almost 8%.

    Now compare that with today… Gold traded sharply lower in October and November. It has spent the past couple of weeks attempting to hammer out a bottom while the MACD momentum indicator has slowly been turning higher. Commercial traders have reduced their net short position from more than 160,000 contracts in mid-October to just 7,000 contracts. And gold bottomed at about $1,055 per ounce on Wednesday – just two days ahead of Friday’s jobs report number and the big one-day pop in the price.

    If the similarities continue to play out, then there are more gains ahead for gold. If the metal can rally 8% off of last Wednesday’s bottom – just as it did in August – then that gives us a target price up near $1,135 per ounce.

    If you bought gold when I mentioned it a little more than a week ago, then stick with the trade. If you’re not in the gold trade yet, consider buying into any short-term weakness this week.

    Best regards and good trading,

    Jeff Clark


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