Oil will follow gold soon

Since Feb 11 when bottoming around $26, oil has mounted a very expressive soar over 80%, a move that is not often seen. Yes, this usually happens to something that is too oversold and too depressed. As I said back then, I expected oil would go up to $40 first before going down to $20. But the magnitude of this rebound is definitely beyond what I have expected. However, I still don’t believe the oil has come out of the woods and will simply go up from here. Instead, I think oil will follow the footstep of gold to experience some significant correction at the minimum.

 

Back in Feb, I started to notice the parabolic move for gold and was expecting a correction should be on the way. I was a bit early but gold indeed has started to correct in the past week or so. This correction should continue for a while. One early indicator for the gold correction was from the behaviors of speculators vs commercial traders in their trading positions as reported in COT. After gold got a significant move upwards, the commercial traders (smart money) started to short gold, which became increasingly intensified as gold further moved up. On the contrary, the speculators (dump money) started to become euphoric for gold and they added more and more long positions along the way. The thing is the smart money is almost always right at the end although they tend to be early. Indeed, at the moment, the smart money proves themselves again this time that gold has been too hot and needs to cool down. This is almost exactly the situation we are in for oil. Per the COT report, the dump money (speculators) usually gets very depressed when oil is low and their future positions will drop to around 200,000 contracts. This was what happened back in Feb. When oil goes up, their future positions will go up as well and when their positions go as high as 400,000 contracts or more, it signals that they have become extremely bullish. However, this is usually the time when the smart money get substantial short positions, signaling the high for oil is in and will go down in the near future. The recent COT report did show that the speculators long positions have gone beyond 400,000 as the oil price is close to $50. I think there is not much left for oil to go up in the near term but rather there is a high risk that oil will tank soon. Be prepared for it if you are long oil now!