Despite Record Shorts, Gold Prices are Marching Higher

Daniel Saffrin, Senior Portfolio Analyst
Daniel Saffrin is a Senior Portfolio Analyst for the Catalyst Hedged Commodity Strategy Fund. Graduating from the University of Wisconsin Madison in 2017, he has two years of experience in the Corn and Wheat pits of the Chicago Board of Trade and over two years of experience at Catalyst. Additionally, he passed the CMT Level 3 and is waiting for professional designation.

The most recent Commitment of Traders (CoT) report showed gold hedgers with their second largest short position on record, on the heels of their largest short position the week prior. Despite this fact, gold prices are marching higher, even in the face of a strong equity market. During gold’s 2009– -2011 advance, hedgers remained short for most of the entire rally, reaching a record short in late 2009, with nearly two years remaining in that bull run. Although the CoT can be used as a contrarian signal in a ranging market, persistent high or low readings can show a trending market as well.

In our July 2019 gold post, we highlighted the breakout of $1,370 on increased volume. There is a saying in trading, “the bigger the base, the higher in space,” indicating that gold’s price breakout can last longer than seven months, given it’s off a six-year base formation.

On the daily chart, gold is finding support at its most recent resistance level (blue line), just as it did while consolidating in the fall (black line). So, although prices are nearly $70 off their highs, this retracement can still be viewed as a normal pullback in an uptrend.

If this is a bull market for gold, the evidence should be demonstrated in related asset classes as well. A highly positively correlated sector to gold is gold miners. These companies derive their profits from the price of gold. The Gold Miner’s ETF, GDX, is showing a similar constructive daily pattern on the chart as gold itself, which can be viewed as confirmation of gold’s price move.

Another related asset class is the 10-year U.S. Treasury Yield. Gold, on average, tends to have a negative correlation to the 10-year yield. Today, the 10-year yield Index ($TNX) is breaking down from its September up-trend, a positive sign for gold given that they tend to move in opposite directions.

Lastly, the US Dollar Index Fund (UUP) has broken down from its two-year uptrend, which can provide support to gold prices and commodity prices in general. A weaker dollar is a tailwind for gold because of gold’s store of value as a currency. Just like gold’s six-year base can lead to a larger rally than seven months, a broken two-year uptrend can also lead to a larger breakdown than just four weeks, which is what we’ve seen so far.