Dec 4, 2017
Silver and gold have hit a new low for the year during December in each of the last five years. They are on track for repeating their journey this year if we are to believe sentiment matters. And I do.
Two measures allow us to gauge sentiment. My favorite is the DSI or Daily Sentiment Index put out by Jake Bernstein. It’s more valuable than cheap. One good trade would more than pay for six month’s service. If you want to see how accurate is it, on December 17th of 2015, the day of the low in gold, it was 8, the low for the year. On December 15th of 2016, the day of the low in gold, it showed a value of 4, also a low for the year.
For silver in December of 2015 the DSI indicated a value of 8 also on the 17th of the month even though silver spiked slightly lower in late January of 2016 for a single day. In short, the DSI marked the low for both metals.
My other favorite indicator of sentiment while free isn’t as valuable as the DSI or as sensitive an indicator. It only comes out once a week and only reflects values for the prior Tuesday. In short the measure is both dated and not necessarily sensitive. It also requires a lot more understanding which few investors, indeed few letter writers have. That would be of course the Commitment Of Traders or the COTs put out by the CFTC.
In my view most people tend to look through the wrong end of the telescope when discussing the meaning of the numbers. To keep it simple, there are two main categories that matter, the speculators and the commercials. Those writing or commenting about the meaning of the COTs inevitably talk about what the commercials are doing and that reverses the logic of what is actually happening.
Contrary to the PermaBulls who need to fill your fantasies in order to stay in business, the commercials are both producers and consumers. For gold and silver they would be mines on the short side and jewelry manufacturers on the long side. In theory in commodities the commercials should show neutral values but for gold and silver, they are most always short since mine financing often requires forwards sales for years in the future while consumers are more short-term concerned.
To understand why the actions of the commercials are meaningless, you need to think of them in a different way. In Vegas they would be the stickman who could care less how the punters want to bet and only works when someone wants to bet. But a stickman doesn’t care if you bet long or short though naturally most of the bets he covers are long bets. The stickman has nothing to do with the quantity of betting, that role belongs to the bettors.
Speculators in commodities are individuals and hedge funds. They determine both the size and direction of betting. So when people talk about silver is going to go up because the commercials are going to have to cover their shorts, they have it reversed. Speculators go long which automatically makes the commercials go short since all they are doing is covering the bets made by the speculators. Speculators alone make markets go up and down. Commercials are the house, that’s all; they don’t care what the bets are.
When the speculators have driven the total number of positions to new highs, it’s a signal of an impending decline. When you do have a major top you are going to have high levels of speculator longs and commercial shorts. But as the speculators drive prices higher as they get longer and longer, the commodity also moves into weaker and weaker hands. At tops, the money moves from the weak hand speculator longs into the strong hands of the commercial shorts. Remember, weak hands buy at market tops and sell at market bottoms. It’s the nature of human behavior. Strong hands buy at bottoms and sell at tops.
For both gold and silver, the speculator longs are still excessive. You don’t have bottoms in anything while the weak hands are still long. So we need a shakeout in the COTs for the weak hand speculators.
Others are calling for lows soon, Bob Hoye, Tom McClellan, Gann Global all see lows coming soon and then a big move up. Stock markets have entered what is probably a blow off move. Bitcoin went curvilinear months ago and it looks like someone just pricked the bubble. Gold and silver crashing lower from here would be the best move investors could want. Remember, don’t go for the puck. Go for where the puck is going to be.
I’d like to see panic moves lower in gold, silver and shares of the metals and those panic moves that always show the low will be forecast by the DSI and the COTs, no manipulation necessary. Gold may not go lower than it did at the very first of the year but I would cheer $1200 gold. A bottom comes this way.
Soon. Very soon.