Record swing in gold sentiment in May

This month, there have been some weird goings-on in the gold futures market (the major price discovery market is Comex in New York).  I have commented previously on the extreme bullish positioning of hedge funds (managed money) to early May.

From a net bearish positioning in the winter to a record net bullish stance in four months produced a swing of around $250 to the $1300 area (one of my original major targets).  Also in the winter, the trade (commercials) were net long futures – a most unusual situation given that miners usually hedge their future output by selling futures and are heavily short.

It appears that to hedge at the near-production costs of around $1000 would have been suicidal – and most abstained.

So far, so good.

But what occurred this month has been truly historic.  For instance, here is the latest COT data as of May 24:

In the previous week, hedgies (non-commercials) sold 55,000 out of their long positions – a massive reduction of 15%,  They also added 15% to their short holdings.  That is some swing in sentiment in one week – and is a record switch since COT records began.

Note that the commercials (users, miners and ETF stockpilers) also ramped up their long positions with a massive reduction of 53k contracts.

Meanwhile, the small traders became more bearish.

With commercials buying like crazy from the hedge funds, we have a situation just ripe for another massive leg up in the gold price.

My long-standing target on the current dip has been $1200 – and this was hit on Monday. I judged this target from the coincidence of the Fibonacci 38% support level and the low of the red wave 4.

In Elliott wave theory, an A-B-C corrective move off the $1300 high often ends with the C wave turning at the low of the fourth wave of the previous five up – and that was around the $1200 level.

And so far, the $1200 low is holding.

Stocks are due a pullback in any case and that should support gold in the near term. Maybe those hedge funds are starting to regret moving to the bearish side in May if this gold rally can find its legs.