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August 31, 2005
Another Gold Rally Bites The Dust
By Brady Willett

As gold declined yesterday rumors began to circulate that a hedge fund was liquidating a massive long position. Whether or not these rumors helped convince a few longs to turn and run is uncertain.  What is certain is that as stops were taken out gold bugs patiently waited for the price level wherein bargain hunters would step into the fray.  $430 may prove to be that level, or not.

COT Analysis Overkill?

Every time gold nears new highs a larger crowd of analysts and gold bugs expects a price pull back because of extreme readings in COT, and every time the price of gold corrects this crowd says that, ‘those dumb tech funds are selling again’. That the crowd of COT interpreters is growing is, potentially, cause for concern.  To be sure, something that is statistically accurate at predicting the price of gold more than 90% of the time (as the COT has since 2002), does not remain an accurate forecasting tool forever.

What can be added to the latest COT dialogue is that the commercials are having to exert more energy to curtail the price of gold with each rally. This suggests that the commercials are closer to losing control of the market than ever before. This also suggests that COT could become an unreliable indicator when, and if, gold breaks to new highs.


As for the tech funds, their actions since 2002 have been consistently baffling: it is as if the tech funds wait until a price surge before buying and then try to sell all at once after a commercial induced decline begins.  With this in mind, until some large entity steps up to the plate and either takes delivery or pledges to outgun the commercials it is difficult to believe that any rally has staying power so long as the commercials are increasing their shorts with each tick higher.  The tech funds decided that the word ‘short’ was no longer  in their vocabulary in late 2001.


In short, after reaching $452.20 an ounce on August 12 October gold slid to $430.70 yesterday. The story goes that the commercials will eventually default as they try to cover their short position with gold that doesn’t exist. Not this time.


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