A Head and Shoulders in gold | Commitment of Traders

Gold has been considerably higher in price than the fundamentals would suggest, based mainly on the idea that it is a safe haven in times of geopolitical tensions, such as are currently provided by the situation in Ukraine. And Ukraine can only ramp up, it seems, due to the scheduled presidential elections.

However, a important Technical Analysis pattern could now be forming, which can be seen above. This is the much vaunted “Head and Sounders” pattern, which traditionally signifies a fall in price.

Commitment of Traders report

But there is now a more fundamental argument to be made for expecting the precious metal to fall. This is the report that comes out once a week on average from the US Commodity Futures Trading Commission (CFTC), called the “Commitment of Traders”, or COT report. This is released on a Friday and contains data up to the previous Tuesday.

The above is an extract from the most recent report. Two figures stand out. These are the short positions of the Swap Dealers, or the market makers in the Commodity market. This figure is an indication that their counterparties hold high long positions, as do the “Managed Money” entities, who are themselves hedge funds and pool operators.

The bottom line is that a lot of people are expecting gold to increase in price. We prefer the contrarian position. The market is a capricious thing.