Townhall: "Gold Could be Set for a Big “Bounce Back” Rally"
Gold Could be Set for a Big “Bounce Back” Rally
Mike Fuljenz / Posted: Jul 14, 2017 12:01 AM
After the Flash Crash in gold on June 26 and the Flash Crash in silver on July 6, Wall Street traders are ultra-bearish on the metals. Traders tend to be trend-followers and they see the trend is now down, so they have sold precious metals. The Commitment of Traders report last week showed that the net long positions in gold and silver dropped for the fourth straight week. In reviewing this data, Commerzbank said, “This puts net longs at their lowest levels since February 2016 [for gold] and August 2015 [silver]. Short positions in silver are currently at a record high….In the past, such extreme positioning by speculative financial investors has often sparked a pronounced countermovement in prices.”
The basic theory of “contrarian investing” is that when most big traders line up on one side of the trade, there are few big traders left holding the bag, so a move in the other direction is likely. In this case, the big sellers have nearly all sold their gold and silver, so even a small amount of buying pressure can push the metals back up. For a recent case in point, the previous low position in net-long gold contracts was February 2016, when gold traded below $1,100. Gold promptly shot up to $1,365 by July 2016. The previous low in net-long contracts for silver was August 2015, when silver was under $15 per ounce. The price of silver reached $20 within a year. When selling pressure is exhausted, greater profits are possible.
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The rationale – I’m tempted to say the ignorance – of the traders is that the Fed might raise interest rates again since last Friday’s jobs report was better than expected, but we have already shown how gold has risen after most of the previous 20 interest rate increases by the Fed, going back to 2004. Pundits also tell us that Europe may start raising rates soon – or at least stop their “quantitative easing,” however they keep going the “easy money” route, adding 60 billion euros a month ($800 billion a year) in new money.
In short, smart investors can use the latest dip in gold and silver to bet on a big bounce back coming soon.
A “Flash Crash” in Stocks and Silver Struck Last Week
Americans first experienced a “Flash Crash” on May 6, 2010, a 36-minute stock market crash of epic proportions. The carnage began at 2:32 pm Eastern time, when the Dow Jones Industrial Index plunged almost 1,000 points (998.5, to be exact) in about 15 minutes, only to recover that loss fairly rapidly, by 3:08 pm. The electronic bid prices for dozens of stocks and exchange-traded funds (ETFs) fell to a penny a share. Investors who had “stop loss orders” or automatic sell orders were wiped out in trading that day.
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