Is The Pullback In Gold Over? – Dave Kranzler (Part 1)

TND Guest Contributor:  Dave Kranzler

Click here for part 2.

The price of gold ran up 20% since the beginning of 2016 through early March.  In response to “overbought” readings in the popular momentum indicators, the superficial gold commentators become short term bearish.  Additionally, based on what appeared too be a heavy “off-sides” in the bullion bank net short position vs. the hedge fund net long position in Comex gold futures, per the Commitment of Traders report, the “big price correction” side of the ship deck became heavily mobbed with short-term timing forecasts.

About two weeks ago, I decided to roll up my shirt sleeves and dirty up my hands with the COT data compiled by my business partner going back to early 2005.  What I found in terms the current net short / net long positioning between the bullion banks and the hedge funds might surprise a lot of observers.  Of course, I presented the information to the subscribers of my Mining Stock Journal in the March 17th issue (along with a relatively undiscovered “de-risked” junior mining stock idea with substantial upside, risk-adjusted).

As it turns out, while the net short position of the criminal banks is above the average net short position from 2005 to present, it’s not even remotely close to the net short position historically that has signaled an imminent price-smash operation.   Currently the net short position is 200k contracts.  But the highest that net short since 2005 has been is well over 300k.  The net short position was well over 200k for large portions of 2010.

In other words, while there is some concern that the cartel is set up to force the price of gold lower by bombarding the Comex computer system with paper gold detonators, the comparative historical statistics suggest that gold has lot more upside and the open interest has a lot of room to expand before the cartel is in a position to throttle gold lower.

In fact, a case can be made that the current pullback in the price of gold may be winding down:

As you can see in the graph above, gold has nearly pulled back to its 50 dma (dark blue line) and the momentum indicators (RSI, MACD) have moved from “overbought” to a neutral position.  The RSI may be actually be turning back up (green box).

As we’ve seen with official intervention in all markets,  it’s nearly impossible to forecast directional moves with any degree of accuracy.  However, there’s a case to be made that the cartel is having problems forcing the price of gold lower.  On several occasions in the last two weeks, gold has been slammed in overnight trading only to snap-back.  Monday was a prime example, as gold was smacked hard for $10 down to $1210 in Asian trading but bounced back to close nearly unchanged from last Thursday’s close of $1221.

The fact that Indian jewelers are still on strike and thereby choking off Indian imports makes gold’s resilience even more remarkable.  At some point, India will have to start importing heavily in order to facilitate seasonal, festival-related gold buying in May.

Even more interesting is the behavior of the mining stocks.  The HUI index ran up 83% from Jan 19 to March 16.  A price correction had to be expected.  While it looks like the miners are still vulnerable to a bigger price decline than the current 7% pullback, don’t forget that the HUI more than doubled between late October and December 31st in 2008.

I’m preparing to chat with the CEO of junior gold mining stock that has been largely unnoticed by U.S. investors, retail and institutional.  But a strategic buyer recently bought a 20% stake in this company and also plunked down a considerable sum of cash for a  1.5% net smelter royalty.  I will be presenting this idea in the next issue of the Mining Stock Journal, which should be out either Thursday or Friday.  This issue will also include proprietary market commentary and other “goodies.”

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About 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.

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