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November has never been a time to sell gold or silver. During breakout campaigns in the past, it has been a month of steady gains with limited pause. So to those wondering if it’s time to take some chips off the table, I’m apt to hold. I believe strongly that the gold and silver markets are headed for a robust month with a sharp 10% correction coming during the first week of December, right on schedule with V-type corrections past. I had paired down my futures position at the end of October out of respect that the S&P had hit its major downtrend line around 1100. In the ensuing selling, I was cautious with my bids as advertised. And then a week ago the Dow plunged 250 points with gold only down 1 at $1045. The news, as it turned out, was that India has scooped up nearly half of the 400+ tons of IMF gold for sale in a private deal. Such was all the metals market needed to rally anew. It always amazes me how quickly the little clues materialize into major moves during these breakout events. Having added some futures positions to my longstanding core position of physical metal, which I never sell and rarely hedge, my aim is to try to hang on for the balance of November, adding more on light dips and testing this thesis that the market should stay well supported. With 2 ½ weeks of real estate ahead, and silver just today, piercing above its downtrend line from its recent peak, there is plenty of reason to believe that the metals have more in the tank.
That’s my strategy. For a while I had let the S$P’s extended run make me question whether gold’s breakout, though right on schedule, beginning approximately 18 months after its Bear Sterns peak of 1032, was for real. The overly speculative readings of the COT report had added some fuel to the questioning, though I never lost sight of the reasoning that in Phase 3 of a gold move, a much wider range of investor interest and participation was to be expected, perhaps setting new levels of what is considered normal spec interest in the futures pits. And this is why the best traders in the world will always respect the tape and not overly cling to any particular notion that challenges it. They retain confidence, through their experience, that resolutions come sometimes in unexpected ways. Take last Friday’s COT as a perfect example. Going inside the numbers, one begins to take comfort in seeing Large Spec Short positions on the rise and a major sell/short covering event having occurred in the Small Spec space, dramatically reducing open position sizes and leaving room from further accumulation. Commercials, while not covering their short position yet (keeping this perhaps explosive affair on the horizon), they have definitely been much slower to add to the short position into strength. Much of that selling, we now see, came from big speculators, typically quick to cover, not at all armed with the same discipline/insanity of the big banks that to this point have refused to break. Could we be setting up for some magnificent moment where there really are no sellers left in the marketplace? It is certainly possibly as the 1000 hurdle has been overcome and the market trajectory remains pointed north. Smart, disciplined traders should really begin to prepare a strategy for an early December selling episode, as it will most likely be caught between 8% and 10%, with the possibility of a V-type bottom, and gold probably ending the year at an all time high. When you begin talking about leverage, timing is imperative, so I am saving my most aggressive moves into higher leverage for such potential action. So far, we have largely followed the script of breakouts past, so such selling is definitely on the schedule, whether it materializes or not. With an improving COT structure, such a play can make one’s year. I, for one, will be ready.
While the technical picture for gold remains as pretty as a prom queen, sometimes it’s interesting to step back from the investment strategies and ponder for a moment, what all this action means. I must admit that it is quite scary to consider the future implications of a gold price that is behaving like a legendary warrior. Does this mean the government has miscalculated on its exit strategy? Or is this exactly what they wanted? Can the system only be saved by inflation? Does that mean a painful event for the savers of the world, those trusting in US dollar denominated securities, is set to materialize at some point sooner than later? Does this mean that the easiest short right now are long-dated US Treasury bonds? I’m not sure exactly yet, but I’m certainly well on my way to asking the right questions. For now, I’m relaxed and letting it breathe.
John Cassimatis
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John Cassimatis has been managing his own capital for 14 years in various markets.
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