Trading And Investing In Gold: Follow The Money

Trading And Investing In Gold: Follow The Money by Dave Kranzler – Investment Research Dynamics

The paper gold attack that I first suggested might occur in the September 7th issue has taken gold from $1360 down to $1270 (continuous contract basis). Technically, gold has moved from an “overbought” condition to a mildly “oversold” condition. The RSI and MACD indicate that gold is slightly “oversold” but I believe both indicators will flash “extremely oversold” before this price attack over. This should occur sometime in the next 2-3 weeks.

I say this because I continue to believe the open interest in Comex paper gold, combined with the analyzing the weekly Commitment of Traders report, is the best indicator of gold’s next move, at least until the western Central Banks are unable to control the price of gold with paper derivatives. To be sure, the COT report is not always a perfect predictor but in the last 15 years the two reports combined have been around 90% accurate.

Currently, the Comex banks’ net short position in paper gold is at the high end of its historical range. Concomitantly, the net long position of the hedge funds is also at the high end of its historical range. Per last Friday’s COT report, the banks began to reduce the short positions, thereby reducing their net short position, and the hedge funds began to reduce the long positions, thereby reducing their net short position (click to enlarge):

The graphic above is from the CFTC’s weekly COT report for all commodities. I’ve referenced the COT report quite a bit so I thought I’d put some “meat” on the bones. The report was published Friday (Sept 29th) but the cut-off day for the data used is the Tuesday before last Friday (Sept 26th). Unfortunately, by the time we, the public, can see the data it’s three days old. By the time we can try to trade on it (the following Monday) it’s four days old. This is unfortunate and the CFTC could force a daily disclosure of the data, which would be ideal, but since when does the Government do anything for the benefit of the public? Having said that, we can still get a feel for then general “flow” of positioning in gold futures by the various trading cohorts. Note: though the CFTC publishes the COT report, the actual data comes from the banks who operate and manage the Comex trading floor and computer systems.

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Dave Kranzler

I spent many years working in various analytic jobs and trading on Wall Street. For nine of those years, I traded junk bonds for Bankers Trust. I have an MBA from the University of Chicago, with a concentration in accounting and finance. My goal is to help people understand and analyze what is really going on in our financial system and economy. You can follow my work and contact me via my website Investment Research Dynamics. Occasionally, I publish on Seeking Alpha too. As a co-founder and principal of Golden Returns Capital, LLC Mr. Kranzler co-manages the Precious Metals Opportunity Fund, a metals and mining stock investment fund.