Gold traders are now extremely bearish on the price of gold bullion. It’s a sign that the price of the yellow metal will likely jump. Investors wanting to profit from such a move might consider buying coins or bars of solid bullion.
Gold prices have been walloped this year by the rising dollar. The prices of all metals tend to move inversely with the value of the greenback.
One troy ounce of gold bullion would recently fetch $1,196, down 13% from $1,368 on January 26, according to data from Bloomberg.
Professional futures market traders are currently betting heavily on a continued decline in the price.
The net position of such speculators could be characterized as highly unusual. The decision of so many more speculators to bet on a decline versus an increase in prices is now more than two standard deviations from the average according to a recent report from New York-based financial firm Macro Risk Advisors. That means such positioning is highly unusual.
It shouldn’t be surprising that traders are betting this way because ever since late January it has been a profitable investment decision. If nothing else the science of investing is one of doing what works right up until it doesn’t work anymore.
What we also know is that when investors get either extremely bullish or extremely bearish, then the market is much more likely to move in the opposite direction. In other words, the positions of the futures markets speculators sometimes get considered to be a contrary indicator.
Right now the historically high short position of such traders would suggest that gold prices are about to rise (that is, they will likely move in the opposite direction of the futures market bets.)
How long it will take for that to happen is hard to tell, as is how much of a move we can expect.
What we do know is that changes in the value of the U.S. dollar this year have been driving what happens in the precious metals market.
If the greenback unexpectedly weakens, then we could expect to see a rally in gold prices. Even a small move in the dollar could prompt those traders who have bet on a continued drop in gold prices to reverse their positions. In other words, they’d buy back the futures contracts that they sold short previously. That could cause a rapid and fierce rally in the gold market. The phenomenon is known as a short-covering rally.
Such a rally may or may not happen. We won’t know for a while. Likewise, even if there is such a move, it isn’t yet clear whether such a thing would be a temporary phenomenon or long-lasting.
What traders should watch right now is the likely next moves in the value of the U.S. dollar. If the greenback weakens, then gold will likely rally. If it strengthens, then we can expect another drop in gold prices.