By Peter Degraaf

For years the best trading strategy in gold and silver has been to buy when the ‘net short’ position of commercial traders was low, and sell when the numbers were high.

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This chart courtesy Stockcharts.com shows the price of gold as a dotted line, along with the ‘net short’ position in blocks. Notice failure on the part of commercial traders (so far at least), to bring the gold price down to where they would like to cover their short positions, as they have done so many times in the past. In May the ‘net short’ position at the COMEX was 132,000 and over the next two months gold fell 129.00. In October the ‘net short’ position had risen to 166,000 and during the next two months gold dropped by 130.00. This time the ‘net short’ position is the highest since December 2012, but the commercials have only been able to cause gold to drop by 50.00.

In this analysis we are drawing the assumption that gold has found support at the $1220 level and is ready to rise from here, notwithstanding the large number of ‘net short’ positions put on by commercial traders.

We draw this conclusion from the performance of gold and silver mining stocks.

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Featured is the weekly HUI chart with 17 week and 43 week moving averages. The green arrow points to the two moving averages rising in positive alignment. This confirmed the bull market in mining stocks that started in late 2008. The purple arrow points to the ‘17’ moving below the ‘43’, thus warning that the trend was about to change. The two moving averages remained in negative alignment until recently when the ‘17’ rose back above the ‘43’ (blue arrow). Patient investors who prefer to make a decision just once every few years, can make good use of this signal. The supporting indicators (RSI and MACD), are positive.

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Featured is the daily gold chart, courtesy Stockcharts.com. Price is breaking out from beneath month-old resistance, and a close above the blue arrow will confirm the breakout. The expectation is that this will likely mark the start of a rally, similar to the February rise. The supporting indicators are turning positive and the 50DMA is in positive alignment to the 200DMA (oval), while both are trending upward.

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Featured is the bar chart for Deutsche Bank, one of Europe’s largest banks. The stock price has been dropping for the past 12 months and each time price tops out, it is not long before the US S&P 500 follows suit. In the event that price drops below the purple arrow, we could very well see a waterfall decline in both the DB chart and in the S&P 500 index. As investors sell stocks, they look for safety. Some of this money is likely to flow into gold and gold mining stocks.

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This chart courtesy Nick Laird shows the demand for gold bullion by China and India, (Russia as well) continues without ceasing.

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Featured is the gold price in Canadian dollars. Price bottomed in November of 2014 and has risen ever since. The channel is rising by 8% per year.

In Summary: Fundamentals for gold are very bullish. Price inflation in key components of the economy exceeds bank interest. Historically this provides energy for gold to rise, as bonds no longer offer protection. Stock markets around the globe are in decline. This money is looking for safety. Negative interest rates are causing people to withdraw savings and look for a place to put this money – gold and silver to the rescue. Commercial traders are short – but then they are always short. Perhaps this time they will help the bull market along by covering short positions.

The technical picture for gold and silver is improving by the day, as we attempted to show you in this article.

Peter Degraaf is an investor with over 50 years of experience. He publishes a daily report for his subscribers. To receive a recent copy of a report, visitwww.pdegraaf.com

DISCLAIMER: Please do your own due diligence. Peter Degraaf is NOT responsible for your trading decisions.