A Pre-Election Precious
Metal Price Cleanse
By Dr. Jeffrey Lewis
As the upcoming presidential election looms on
November 6th, the recent 'correction' lower in gold and silver came
once again as the COT report showed short positions held by Commercial Traders
increasing notably as the net long positions held by large and small traders
Furthermore, not only were they running
substantial short positions, but it seems as though the Commercial traders,
which consist primarily of big bullion trading banks, needed to print a price
under the 1735 level in gold — which corresponded to the 32.50 price level in
silver — in order to trigger some substantial stop loss sell orders.
The rather predictable result was a sharp, but
short lived, stop loss fuelled decline in both of those precious metal markets,
as the weekly price chart below shows.
Figure 1: Weekly candlestick chart for the
price of Gold, with the COT report breakdown shown in the indicator box below
the price action.
Shaking Out the Weak Longs
Overall, this downside price action looks
pretty typical of a mid-rally attempt to shake out weak longs by the chronic
precious metal shorts.
Nevertheless, once the commercial traders have
managed to shake out as many as they can of the weakly held speculative traders
that have only recently established their long positions, their typical trading
pattern will be to start covering their shorts once the stop-driven downside
move loses momentum.
Also, most of the longer term traders who have
been accumulating silver and gold in the hopes of an upside breakout will
probably be covered enough by their recent gains to stop worrying about a
temporary correction and hang tight in order to keep making money on the long
side as the market recovers.
The prevailing chart pattern shows that the
‘handle’of this correction will probably be completed in the very near term.
Initially, the handle target was in the region of $1688.00 for gold and $31.50
Nevertheless, despite this recent correction,
the current outrageously bullish technical picture for the precious metals
supports the view that strong support seen at the $1720.00 level for gold and at
the $32.50 level for silver will hold.
This is the perfect sort of price action to
accompany the declining volume numbers.
Price Corrections Present Opportunities
Price corrections like this can serve certain
behavioral needs of market manipulators since they tend to undermine sentiment,
as they also deflect attention and momentum away from the precious metals
Still, letting the big commercial players
trigger sell stops like this can actually be a rather good thing. It just
creates some much needed buying opportunities for smart smaller traders.
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