April 13, 2005
A Good Time To Sell Gold
By Brady Willett

The gold commercials reduced their net short position by 427 contracts last week (futures & options as of April 5).  This marked the third week in a row that the commercials have reduced their net short position, and - not surprisingly - the third week in a row that the price of gold declined (on COT day).


While the contrarian could argue that when a steady decline in commercial short interest coincides with a steady decline in the price of gold that a reversal is near (in both the price of gold and net commercial short position), there are two ominous points of interest that should first be brought to light:

1) The net commercial short position is still in control of an historically large percentage of the gold market (43.7% of Open Interest), and - despite the decline in the total short position - has actually increased in each of the last two weeks.

2) History suggests that the commercials could easily add to their net short position by 75,000+ contracts if gold rallies.

Suffice to say, the contrarian could theorize that the near term outlook for gold is bullish based upon the declining NCSP/POG trend, but a more rounded investigation of the COT suggests that the likelihood of a major increase in the price of gold is extremely remote (unless the ‘end’ to commercial manipulation as we know it is near).
 
Seasonal Factors Also Threaten To Tarnish POG

Although successful investment decisions can not be made by looking at a calendar alone, the fact that gold has hit yearly lows in April/May in the last two years and yearly highs in December in each of the last three years should be enough to give the gold bug pause.


If the above set of statistics is not clear enough, consider the net change in gold open interest (month-to-month), using the average monthly volume figures for the last 8-years and last 3-4-years (or the bull market period beginning in 2002). Paying no attention to the price performance of gold, what these numbers tell us - given that open interest tends to rise and fall with the price of gold - is that the worst possible time to own gold is late April. To be sure, the May-June period is the only two month period that gold open interest has declined in both months when observing the short term (3-4-years) and the longer term (8-years).


Conclusions

The US dollar is still doomed and the price of gold is still in an uptrend.  However, ominous COT configurations and seasonal forces suggest that another gold price wipeout will come to pass before the price of gold tries to gear up for its fourth late-year rally in a row.  Drawing upon the above set of open interest figures, the best time to buy gold is in late August (or before open interest is expected to rise dramatically in Sept/Oct).

Incidentally, although the week-to-week COT statistics are invaluable to traders/short term investors, they mean absolutely nothing to the long-term investor that owns gold to he