Gold is starting 2014 on a high note, rising 4 percent after finishing off the worst year since 1981. And with bullion now trading at two-month highs, traders say a short squeeze could be imminent.
"In a heavily shorted market, you'll get to a level where people can no longer stand the pain, and then everybody rushes to the exit at once, causing the move to feed off of itself," said Jim Iuorio of TJM Institutional Services.
(Read more: Gold benefits amid turmoil in China, emerging markets)
According to the Jan. 14 Commitments of Traders report from the Commodity Futures Trading Commission, short bets on gold rose by 2.9 during the previous seven days, adding to the already-sizable short positioning in the market.
Being short gold in 2013 was a phenomenal trade, as the metal fell nearly 30 percent. But at this point, gold bears may be overplaying their hand.
"There are a significant people out there who really believe the gold price should be much lower, and you have a record amount of shorts in the market" said Mihir Dange, a gold options trader with Grafite Capital. "But usually record shorts and a rally should lead to some sort of squeeze somewhere."
