Analyzing market sentiment is not a simple task. In 2022, this task is made all the more challenging due to the instantaneous flow of information and analysis across social media. One day it might feel like markets are sure to crash, and then the next day everyone will have forgotten about what they were worried about the day before.
One of the better sentiment tools available is the Daily Sentiment Index (DSI), a tool that tracks sentiment readings for more than 30 futures markets including metals such as copper, gold, and silver. After following DSI readings for the last seven years I have noticed that it is extremely rare for the readings for gold and silver to simultaneously fall below 10. At the March 16th, 2020 covid crash low silver fell below 10 but gold was still up in the 30s. Similarly, at the May 2019 low in precious metals the DSI readings for gold and silver were still both in the teens.
Yesterday, the DSI for gold and silver both ended the day at 9. The last time we saw both readings fall into single digits was 2018. On August 15th, 2018 the DSI for gold registered a 6 reading and silver registered a 7.
What's notable about mid-August 2018 is that gold registered a sentiment low on August 15th, however, the price fell even further on the morning of the 16th before rallying back to near unchanged by the end of the trading session. Gold then proceeded to rally from ~$1170 to ~$1220 over the next couple of weeks.
The low at $1167 on August 16th, 2018 proved to be a major turning point. However, it required a near complete washout in sentiment followed by a grueling multi-month stair-step higher before it became clear a major bottom had been put in place. By definition we only know a market bottom has been made weeks or months after it has occurred.
While a 'double single-digits' DSI reading for precious metals has a strong track record of closely coinciding with price lows in gold and silver, it should also be noted that in the depths of the 2013-2015 bear market there were several days in a row in which gold/silver registered single digit readings and prices continued lower. While there were bear market rallies during this period, they quickly fizzled and the DSI wasn't able to get much above the 40-50 neutral area.
Sentiment analysis is far from a perfect timing tool, but it can offer some good clues that can become valuable when overlaid with other tools. The latest Commitments of Traders (CoT) from the CFTC shows that commercials (large banks and producers) have covered almost their entire net short position in silver futures (red line at bottom of chart below). Furthermore, futures open interest in precious metals has declined significantly in recent months, another sign of increasing disinterest and negative sentiment on metals.
There is a good chance that the CoT data released tomorrow afternoon will show that the commercials have covered their entire net short position in silver. A very rare occurrence that closely coincided with a major low in precious metals in May 2019.
Yesterday afternoon, I spoke with Bob Moriarty of 321gold and we discussed the DSI readings and why Bob believes a major low for precious metals is imminent. We also discussed a variety of other topics including Russia/Ukraine, the European energy crisis, and a drill program recently announced by a junior at a gold/silver target in northern Nevada.
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