Speculators Send a Warning During Gold's Crash
This essay was originally published in DailyWealth Trader, a daily trading advisory, and has been adapted. To learn more about this service, click here.
The gold market is missing the key ingredient for a bottom...
Gold has dropped 25% since its January peak. It's teetering on the edge of a full-blown bear market. And yet, panic hasn't set in.
Speculators aren't buying gold hand over fist. But they also aren't turning against the metal in a meaningful way.
That lack of panic often means that the drawdown has further to fall. As we'll explain, that's what we expect for gold...
Specifically, we can see it by looking at the Commitment of Traders ("COT") report for gold. The COT reports cover what futures traders are doing in bonds, stocks, currencies, commodities, and more.
When considering investor sentiment, we track two groups of traders: the commercial hedgers and the speculators...
The hedgers are the "pros." They're the industry experts who manage money for a living. And they have a history of being good at timing the market.
Speculators are the opposite. These traders often try to make a quick buck in the market. And they tend to get the timing wrong.
When speculators are all betting in one direction, you typically want to do the opposite. If they're all acting on extreme greed or fear at the same time, they tend to make terrible trades.
The COT report gives us the inside scoop on what these speculators are doing... to help us avoid the crowd.
The Signs of Weakness for This Gold Boom
Now, let's get back to gold. The metal has been on an absolute tear in recent years. It rose 234% from September 2022 until its peak in January. But for the first time in years, that boom has been under pressure.
The 25% drop since January puts gold below its 200-day moving average (200-DMA)... a measure of the long-term trend. In a bull market, assets tend to stay above this trend line most of the time.
Breaking below that level signals weakness. That's exactly what's happening today...
This is a major breakdown in the gold boom. But it gets worse when we consider the COT report for the metal.
That's because a gold crash usually only ends once speculators have become extremely bearish. Folks give up on the commodity entirely... And then the crowd goes "all in" on lower gold prices.
Importantly, that's not happening right now. Speculators can get a lot more bearish from here before they reach extreme territory...
Whenever speculators reach levels of extreme bearishness, that's a great buying opportunity. And as you can see in the chart above, there were two of those opportunities in the past decade.
In 2018, speculators were extremely bearish on gold. The metal traded around $1,200 an ounce back then. It turns out, betting against gold was a terrible idea. It rose 76% to above $2,000 an ounce in roughly two years.
The next great buying opportunity happened in 2022. Speculators were the most bearish they'd been in four years. That bull market lasted until this year, with gold rising 234% to above $5,000 an ounce.
Now, you'd expect some panic from speculators after the recent sell-off. But they aren't budging just yet.
The crowd shows no sign of giving up on higher prices. Perhaps they're hoping this drop is a buying opportunity before a new rally starts.
With gold breaking below its 200-DMA and this lack of fear, that's likely a mistake. The market is showing us that we need to take the sell-off seriously.
We should expect more pain ahead as speculators fail to see the market's warning.
Good investing,
Chris Igou
Further Reading
In the early 2000s, one commodities trader made millions of dollars making risky bets for his firm. But then his good luck unraveled... and he singlehandedly caused one of the biggest blowups in history – one that offers a valuable lesson to investors today.
"Investors drive themselves crazy worrying about timing," Brett Eversole writes. But if you're right on the big picture, even the wrong timing can prove profitable. Brett experienced this lesson firsthand earlier this year on a gutsy call that led to three triple-digit winners.
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