Loading ...So the big question is: why isn’t Gold rallying to a greater degree already, given such extreme positions held by both the Funds and Commercials? The influence of China on Gold since April is the primary reason, but considering this solely from a positioning perspective, I still believe we may be seeing a repeat of late 2015.
What I mean by this is that Funds were record short in July that year, when the price hit a low of 1072—its lowest price since February 2010. This was followed by a sizeable rally to 1191 in October that year, only to fall to a lower and final low in December, when the price reached 1045. Funds were holding even greater shorts at this point, a new record low. The dumb money was wrong at the worst time yet again, and Gold proceeded to have one of its biggest rallies in history over the next seven months. What if this is now playing out again?
Funds held a new record net short position on October 9, when Gold retested its closing low of 1184 in August. Then Gold rallied to 1246, as that short position was cut by 65% in two weeks, similarly to October 2015. We may need to see another record short position this time around before the final low is in place, just as in December 2015. Given the size of the short position on October 9, this would have to be a truly gargantuan level of shorts. This scenario also means lower lows for Gold prices, just as in December 2015.
This makes sense given that it sets us up for a massive rally to follow. It also marries well with the ideal scenario for a bottom based on sentiment, specifically the 21D MA, and a positively divergent lower low. Taken together with likely oversold yet positively divergent technicals, this also matches the fundamental thesis provided last week and would provide the perfect combination for what I believe will be the most spectacular rally in Gold ever seen, eclipsing that in the first half of 2016.