An Epic Gold Short Squeeze Began on Friday

Gold on Friday rallied by $19.30 to settle at $1,206.30 per oz, its largest up day of the last five months! On Friday evening, the CBOE released its latest Commitment of Traders (COT) report, based on settlement data from this past Tuesday, August 21st.

According to the new COT report, hedge funds as of Tuesday's settlement were short a record $22.72 BILLION worth of gold, which is a new all-time high and 5.8X larger than their trailing 12 year average gold short position of $3.92 billion. Hedge funds have increased their gold short position for the last 10 consecutive weeks, including 6 straight weeks of new record high short positions!

Hedge funds as of Tuesday's settlement have a record negative net long position of -78,579 contracts, which is 3.24X larger than the record that was set at year-end 2015 of -24,263 contracts when gold bottomed at $1,051 per oz. Over the following six months, gold exploded from its low by $316 or 30% to a high of $1,367 per oz. Gold appears to have begun what will most likely become another epic short squeeze!

In an attempt to estimate how many shorts covered on Friday during gold's rally of $19.30 per oz, we looked back at instances of gold gaining between $19 and $20 per oz in a single week (between COT reports) to see how much its net long position increased during those weeks. Since 2006, gold rose between $19 and $20 per oz in a one week period (ending on Tuesdays) on 15 occasions. During those weeks, hedge funds increased their net long position by an average of 12,830 contracts. Therefore, NIA estimates that the managed money net long position could have increased on Friday by 12,830 contracts to -65,749 contracts.

The managed money net long position has now been negative for six consecutive weeks and has never been negative for more than eight straight weeks. Over the next 7-12 trading days, expect to see additional short covering and long buying of approximately 65,749 contracts, to take the net long position back to being even. This alone could be enough to drive gold back up to $1,300 per oz.

Gold is clearly in a new bull market that began in December 2015 when gold bottomed at $1,051 per oz as the Fed began its current rate hike cycle. It's amazing that despite the negative net long position becoming 3.24X larger than December 2015, gold's lowest settlement price last week was $1,176 per oz. As recently as January 2017, gold declined as low as $1,128 per oz, with a net long position that was still positive by 38,923 contracts.

This is part of a continuing trend. When gold peaked in January 2018 at $1,363 per oz, its net long position was only 214,595 contracts. Four months earlier in September 2017, gold needed a much larger net long position of 264,934 contracts just to reach $1,347 per oz.

Based on this ongoing trend, when the managed money net long position once again returns to between 200,000 and 300,000 contracts, we could be looking at a gold price of between $1,500 and $1,600 per oz.