by David Brady, Sprott Money:
This is my first article for Sprott Money—the first of many, I hope—and I am thrilled to be able to say that I believe we are on the cusp of a significant rally.
The positioning of the Money Managers, or “Funds”, in the Gold futures market is at extremes that have typically led to massive rallies in Gold. They are usually net long, but as you can see from the table below, when their net long position is sufficiently low, it tends to lead to significant rallies in the price of Gold.
Well, at 39k contracts on Tuesday last, this was one of their lowest net long positions since Jan 2017. It clearly indicates a high probability of a significant rally from here (and given the drop in price since then, they are likely even less long, perhaps even net short). We could see a rally of anywhere from 7% to 13% based on prior rallies. At the close of 1288 on Tues, this would mean a rally to somewhere between 1378 to 1455. Sounds good right? But we don’t have to rely on positioning alone for such a forecast.
Sentiment is a great tool to gauge the direction of all markets, but it works especially well in Gold and Silver markets. It is also primarily a contrarian tool. By that I mean: when everyone is bullish, that is typically the best time to sell, and when everyone is bearish, the best time to buy. My preferred tool in this regard is the Daily Sentiment Index or “DSI”. It was the primary tool that enabled me to call the peaks and troughs in Gold over the past few years. It is showing extreme bearishness in Gold right now.
The DSI measures sentiment on a scale from 0 to 100, with anything below 20 indicating extreme bearish sentiment and anything above 80 indicating extreme bullish sentiment. As of Tuesday, it was showing one of its lowest readings since the bottom in Dec 2015—extremely bearish, similar to levels seen at the lows in the table above. This is counter-intuitively bullish for Gold and matches what positioning is telling us.