What a difference 6 months can make in the gold market. In October of last year we were looking at bearish gold price forecast for 2018. It was an assessment based on a deep analysis, not on emotions (pro vs anti gold) nor on a dogmatic belief like some perma bears or perma bulls. As always, we try to neutralize emotions and news, which both serve as noise, in order to stay focused on our methodology. Given the evolution in the last 6 months we cleary see the first signs of a new bull market in gold and silver starting in 2018, this is why.
Before looking into the bull market signs of 2018 we want to point out that our objective viewpoint comes back in every forecast we make. Again, we are not perma bulls nor perma bears. This is what we wrote in the 2018 gold price forecast:
We see 3 potential scenarios related to the price of gold playing out in 2018, which we discuss in this article. We highlight which scenario we believe is likely to play out, and which price levels to watch to validate either of our scenarios.
Our bearish gold price forecast was based on a couple of criteria, one of which being the price. The line in the sand in 2018 is $1350 which is what we wrote last year.
Not only is the price of gold moving gradually to $1350 with a pattern of higher lows, which shows strength, but also do we see much more frequent attempts to test this level. The ultimate pattern which makes this point is the rounded bottom which we featured in this gold article.
This is one of the two new insights we got from the gold market since we wrote our article last year.
And here is the second, even more important, insight: the gold futures market structure visible in the COTs (Commitment of Traders reports).
A strong sign of an emerging gold bull market in 2018
The price of gold is largely defined by the futures market. Whether this is gold price manipulation is not relevant for this discussion, it’s outside of our scope and our interest of this article. What matters to investors is which leading signals we can recognize in the gold futures market structure.
The most important insight in the futures market is this: what is the futures size position of the commercial traders on the same price level over time.
Let’s apply this to the 9-year chart. The $1350 level, you know, the one we outlined above and in our gold price forecast last year, is indicated over the last 4 years with the 5 red circles on the price chart below. The corresponding volume of short positions of commercial traders is visible in the lower pane. Do you see the pattern switch which started in the same month as we wrote our gold price forecast? At that point in time we were still looking at the bearish trend. However, since then, the level of short positions is decreasing every time gold comes close to $1350.
What does this mean? Short positions of commercials provide stopping power to the gold price. In other words, every time gold comes close to the $1350 level there is increasingly less stopping power. This implies the gold price will sooner rather than later break through the Chinese wall of $1350, and break out of the 7-year bear market!
We believe this breakout will take place in the coming months, for sure in 2018!
An even more explosive sign in the silver market
Similarly, the silver market has the same setup but it looks even more explosive. Note how big the difference is in the short positions of commercial traders between last October and today on a silver (SILVER) price that is trading just 10 to 15% lower.
The silver market looks like a giant pressure cooker. Once gold breaks out we believe silver will outperform but we preserve the right to revise this forecast depending on how fast commercial traders add to their short positions (blue bars on below chart).