Gold is on the Verge of a Bull-run and Here's Why

By: Umer_Mahmood

The majority of gold traders are very bearish on the gold market currently. The sentiment could signal a start of a possible jump in price for the precious metal.

If you are also expecting such a price shift, you might want to consider buying the SPDR Gold Shares ( a fund holding bullion bars).

This year, the price of gold dropped due to the rising dollar. The evaluation of the yellow metal tends to act inversely with the dollar value. You can check today's live gold rates on business24-7.ae

One troy ounce of gold bullion currently costs $1,197 which is 13% less than it was at the start of the year, according to Bloomberg data.

The majority of futures market traders are counting on a decrease in the gold price.

The amount of such speculations is quite extreme. There are many speculators who believe that the price will decrease. The amount of bets on a decrease now stands at more than two standard deviations from the average. The data comes from the Macro Risk Advisors company, which is based in New York. Such amount of bets is therefore rather unusual.

It makes sense that traders behave this way, as betting on a decrease turned out to be profitable since January this year. If you follow the basic science of investing, you will do what is profitable until it is not anymore.

Another thing we are aware of, is that when traders become very bullish or bearish, the price will most likely move into the opposite direction. To say it differently, the future market speculation at the extreme is often considered to be a contrary indicator of the price movement.

By this logic, the historically high number of short positions indicates that the gold price is going to increase, moving into the opposite direction of the future market predictions.

We can't say for sure when it will happen and for how much the price will increase. What we do know, is that the evaluation of the U.S. dollar plays a significant role to what happens on the gold market.

If the dollar value drops, we expect to see a jump in gold prices. Even a small move could trigger the domino effect as traders, who are counting on a continued drop of gold prices react and reverse their positions. That means they would buy back the future contracts they sold beforehand. That would mean a quick and sharp upswing on the markets. This is known as a shot-covering rally.

The possibility of such rally is here, however nothing is completely certain, especially on the speculation markets. We also can't predict if such a move would be a short term swing or a long lasting change on the markets.

What you should look for right now is the next movement of the U.S dollar value. If it drops, the gold markets will most likely rally. If it moves the opposite direction, we could see another drop in gold prices.

By Umer Mahmood

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