Last summer we highlighted the record small speculator net short position in gold futures just one week before the yellow metal ripped more than $150 in the space of a month. The latest Commitment of Traders Report shows a new record small spec net short interest as of Tuesday, September 30th:

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Gold_CoT_9.30.2014

Last August we wrote the following:

"Just as risk was decidedly to the downside in September/October 2012 with small speculators holding a record net long position, risk is now clearly skewed to the upside as small speculators hold a record short position. CoT data is NOT a market timing tool but it certainly helps to highlight where the risk lies in a given market."

We feel the same way right now. Small speculators are 95% using trend following systems which will almost certainly 'stop out' of gold futures shorts on a move back above the $1240-$1250 level. This dynamic offers an intriguing situation in which gold could easily rally $70-$100 solely on short covering, while it just ended the week $10 from major support. The situation is growing more interesting by the day; while the trend is clearly lower, the astute market observer will quickly appreciate that the risk is decidedly to the upside.

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