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James Hyerczyk
Comex Gold

Gold futures are edging lower on Friday shortly before the regular session opening. With the easy trade over, investors now have to revert back to the fundamentals to determine whether they want to be buyers or sellers. And, of course, those unfortunate souls trapped at the seven year high are going to have to decide what to do with their losing positions.

At 12:29 GMT, February Comex gold is trading $1550.40, down $3.80 or -0.25%.

Let’s look at the events over the past few weeks. Based on the Commodity Futures Trading Commission data, we know that the hedge funds had been accumulating gold since mid-November. As the trade talks with China were improving and stocks were starting their climb toward multiple record highs, the U.S. Dollar was crashing because investors felt they no longer needed to hedge against an escalation of the trade war.

As the U.S. Dollar was breaking, the hedge funds were taking risk by buying gold. The trade involved too much thought for the uninformed gold trader who was waiting for an event driven rally. The brokers were noticeably absent from the gold market too. In other words, the hedge funds were buying gold when no one else wanted it. The sellers were operating under the premise that a trade deal would be good for the global economy and therefore, bad for gold prices.

As tensions between the U.S. and Iran began to increase over the Christmas/New Year holidays, gold started to climb as so-called “safe-haven” buyers began to enter the market. Prices began to spike higher with the U.S. airstrikes that killed the Iranian general, and rose to a seven-year high when Iran retaliated with missiles of their own. Prices hit a high and began to retreat when the U.S. didn’t respond to the retaliation and an Iranian official said they had “concluded” their retaliation.

So we have the classic pattern in the market. The hedge funds bought when no one else wanted gold and they sold gold to the public when everyone wanted gold. It happens all the time. Learn the pattern. The hedge funds were rewarded and the brokerage firm customers were left holding positions at the top.

Since the professionals trade gold for a living and the public tends to chase the news, the pros are going to want to get back into gold, but only when they see value. In the absence of any new developments in the Middle East, the professionals are probably going to try to create a bearish picture to try to drive the weak longs out of the market so they can buy at value levels.

They could try to bring in more buyers by painting the tape and driving prices back toward the highs, or they could just pull their bids and drop the market into a support area at $1533.20 to $1514.30. This more could cause panic selling by the weaker longs.

It took nearly two months to drive gold from $1453.10 to $1613.30, and a mere two days to retrace nearly 50% of the move.

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