Beware the Banks

Next week, we have the Chinese New Year holidays from Jan. 28 to Feb. 3. In the past two weeks, the Banks (aka “SWAPS”) have increased their net short position in Gold by 15%, the second biggest increase in ten months. At the same time, Gold rose just 2%. It looks like they are trying to cap or slow the move up in Gold ahead of the closure of the China markets beginning next week.

Banks & GLD

The Chinese have been big buyers of Gold, and their absence will reduce liquidity. Illiquid markets are easier to push one way or the other. It takes less capital or contracts to move the market. The Banks have deep pockets, and they can create futures contracts at will, dump them on the markets, and take out the stops below, should they choose to do so.
They also have multiple indicators on their side.

4-Hour

Gold Futures 

Daily

Gold Futures 

Weekly

Gold Futures 

Gold Charts Show Mixed Signals

• Gold is approaching the record high at $2802, key resistance.

• There are multiple negative divergences across all momentum indicators and over various timeframes.

• The daily chart is also approaching extreme overbought levels.

• The 50-day moving average is on the verge of breaking the 100-day moving average to the downside, which would be bearish.

• Sentiment is very bullish, which is bearish. The herd is almost always wrong at extremes, and the Banks know it.

Banks Load Up Short Positions in Gold

If that weren’t enough, the Banks are loading up short when Gold has barely budged. At the same time, the Funds (aka “Money Managers”) jacked up their net long position by 18% to almost 200k. The so-called “dumb money” is called that because they tend to be wrong at extremes. So, if they are loading up long, the price is more likely headed south.

If I wanted to create the ideal setup to drive prices lower, this would be it. Everyone is euphoric at a new record high, Gold is extreme overbought and negatively divergent, and the markets are illiquid. The perfect scenario to pull the rug out from under Gold and Silver.

Gold Market Overbought Conditions

Let me be clear: I am not clairvoyant. The metals can continue higher. But we’ve all seen this before, and we shouldn’t be surprised if it happens again and the metals are slammed lower. It’s a warning.

Banks Increase Short Positions in Silver

The Banks increased their net short position by 38% over the past two weeks, a huge move. But nothing compared to the Funds, which pumped their net long position by 71% over the same time frame. A gargantuan increase for just a 3% rise in Silver.

If the Banks want to pull the rug out from under Silver, it will be a lot easier for them to do so since the Silver market is much smaller than that in Gold, which itself is not a huge market by any stretch of the imagination.

Silver Chart Patterns Indicate Uncertainty

4-Hour Chart

Silver Futures 

We have a big, crystal clear bear flag on the 4-Hour chart. A break of the lower trendline and the prior low at $30.77 would signal a potential dump in Silver.

Daily Chart

Silver Futures

Making it more complicated, we have a bull flag in process on the daily chart, and Silver is trying to break out to the upside, above $31.70.

They certainly don’t make it easy. Two charts of the same asset, Silver, telling opposing stories.

However, note that the 50-day moving average in Silver has broken the 100-day moving average to the downside, and this is bearish.

Weekly Chart

Silver Futures

The weekly chart showed multiple negative divergences at the peak of $35.07 and the RSI and MACDs are continuing lower. However, this does not negate the possibility of one more negatively divergent higher high or a blow-off top, should price and the momentum indicators turn back up.

By contrast, the weekly indicators could just bleed lower.

Sentiment in Silver and Gold Markets

Sentiment in Silver is as bullish in Gold. While it could become extreme with a higher high above $2802, the odds favor a big drop thereafter. If the banks do want to slam Silver lower, that would be the best time to do it.

Silver allows for one more pop to a higher high, but if it gets there, it is likely to be extreme overbought, extreme bullish, with the Funds loading up long. If this happens during the Chinese holidays, this would be ideal for the Banks to drive both metals lower.

Conclusion: Prepare for Volatility in Gold and Silver

This is a warning, not a set-in-stone forecast. The Banks certainly look like they want to drive the metals lower next week based on the rapid increase in their net short positions, and especially when both Gold and Silver barely moved.

That said, I don’t rule out one more pop to a new higher high between now and then, creating maximum overbought and bullish conditions, which make it even easier to pull the rug from under both metals.

This is just another example of different routes but with the same destination. Gold and Silver can go higher in the very short term, then look out below, or go straight down, imho.

Buy gold and buy silver today to secure your financial future.