Speculators waging short bets in the gold market may get caught offside very soon. The CFTC Commitment of Traders numbers show that speculators have loaded up on short gold contracts in unprecedented quantities. Oddly enough, as trader’s short interest has skyrocketed the price of gold has been firming, this positioning setup could lead to a major short squeeze. Usually, when short interest rises the price of an asset is pushed down, but recently gold has not been falling and this could be a contrarian indicator.
Last week gold spiked along with volatility. Between October 10th and 15th gold rose by almost 4%, possibly signalling a breakout from the short-term downtrend that began in April. Gold peaked in 2011 at around $1,900 per ounce and trended downwards until late 2015 when it bottomed at around $1,050 an ounce. Since 2015 gold has made higher lows, hovering around the $1250 mark, prices have lacked a decisive direction.
In order to understand where gold could go it is important step back and view price swings from a historical perspective. Between 1970 and 1980 gold experienced a dramatic bull market rising around 2,000%, then between 1980 and 2000 gold drifted lower by around 70%. Between 2000 and 2011 gold rose over 600%. An ounce of gold was around $300 in 2000, and today prices are over
$1200, so despite short-term price swings the gold bull market remains firmly intact over the long run.
It is also important to consider that gold has been used as a store of value for thousands of years, since before price records or fiat currencies even existed. Gold was very highly regarded in ancient Egyptian and Greek civilizations, and today every major central bank holds significant gold reserves. Central banks went from net sellers to net purchasers of gold around 2009, and since then countries like Turkey, China, Russia and Kazakhstan have be stockpiling gold to catch up to much higher gold reserves held by developed countries. This underpins global demand fundamentals.
Supply side fundamentals also provide a strong backdrop for future gold prices. Global gold production has been falling for years as exploration and investment have dwindled, gold ore grades have also declined. However, those mining companies with strong balance sheets and proven reserves in the ground will rise exponentially if gold strengthens further.
Gold is the ultimate store a value and world’s safest currency since it carries no credit risk, and the precious metal should make up a proportion of every prudent investor’s portfolio.
Disclaimer: Please note that while Valbury Capital has made every attempt to ensure the accuracy and reliability of the information provided in this document it can give no warranty of any kind. The information provided is intended to be of a factual nature only and is not intended to amount to investment advice or to contain any form of investment recommendation. No person should rely on or use the information provided to form any investment decisionMore News & Opinion