Gold COT studies

The recent COT demonstrated one more time the increase of net short exposure of commercials. Let me remind you: when the gold price at the end of September moved again to 1800, the net short position of the commercial traders was much more than all their spending during the year of correction.
Definitely it was not a good signal for the market. Immediately downtrend started; it has begun with a significant decrease of commercials short position. However, two-three weeks ago commercial traders returned to going short. 
All these moves should not be ignored. Therefore, I began looking for similar patterns in the past. 
There was a lot of discussion in the Net regarding some correlation between the gold prices in 2006 – 2007 and current correction of the market. I believe that the analogy has some value and can have some forecasting potential. Moreover, the dynamics of commercials net short exposure at that period is very similar to what we see on the market now. 
The most important moments are shown in the illustration.

Let us look at it together. Before any correction in 2006, we see there a long enough period when the short exposure went down. It is similar to trend moves in 2011 – 2012.
At the end of February 2007, the price reaches the important resistance level, so commercial traders increase rapidly the amount of short exposure exceeding the decreases of the previous year. The analogy between that and the current situation is obvious. However, there was no passing over that important resistance level, as there is no passing over it now. Instead, the price went down, though the downtrend was not significant, and there was no complete decrease of short exposure to the previous level. 
Thus, we followed our analogy up to the current moment. From that moment, the analogy between the behaviour of commercials and the price dynamics can serve as a kind of forecast.
So, the decrease of short exposure is just small jump; it is shown by orange marks on the diagram. Then the amount of short exposure goes practically to the previous maximum. And we see that the price goes back to February “highs”. We have seen that in the end of April 2007.
And then, to wash out commercials shorts, long correction period was required.
So, let us make some conclusions.
1. After the massive short exposure, it took 4 months to eliminate it and recover the bullish status, according to COT parameters. 
2. If we follow the analogy with 2006, we should not expect any serious down trend. I would say, it may be ‘Saw” and testing of lows around 1640.

November 28, 2012