July 15, 2005
August Gold reached $444.20 on June 23 and closed at $419.40 yesterday. For many – including newly adorned conspiracy theorist Peter Grandich – the latest sell off in gold has been brought about by the evil gold manipulators.
Conspiracy theorists can easily argue that the above chart is proof that the price of gold is being manipulated. After all, in no other major market, save silver, do the commercials consistently accumulate shorts and accurately time (and profit from) every major near term top.
While it is impossible to refute this logic, the issue nonetheless boils down to one question: Is it illegal to try to move a financial market with the goal of igniting and profiting from subsequent movements? The answer, of course, is YES (think Citigroup in Eurobonds). But with regulatory oversight being uncooperative the only way to prove and/or stop the gold manipulation is to make the commercials (and their backers?) come up with the hard gold to cover their paper trades. Think of the commercial rigging as a giant naked short trade. With the commercials having deep pockets forcing them to cover gold they do not have is difficult to do.
Gold is declining and this means that the commercials are covering their shorts for profits. Accordingly, and assuming that more than 3-years of infallible statistical events hold firm, the outlook for gold – based solely on COT - is negative but improving.
Another area of interest for gold watchers is the US dollar. With the Euro having fallen and not likely to get up in the near term, and no other major currency backed by the yield/growth combination being offered by America, the dollar could take a few moments more before resuming its decline. However, with the dollar commercials – which are not as proficient at generating a sell off as their gold counterparts – continuing to add to their record net short position (futures & options) the outlook is anything but positive.
With the threat of global rebalancing not about to vanish anytime soon, gold should avoid walking the plank and retesting $400 an ounce. But don’t be surprised if gold walks the line until the US dollar resumes its downtrend. The line in question is drawn by the commercials, and can be studied each Friday when the COT statistics are released. While these statistics do not comment on global supply/demand trends in gold, they are nonetheless what usually move the gold market.
In short, the next time gold falls by $5 an ounce don’t go looking for what ‘new news’ development made the decline possible. Rather, understand that the $5 decline is the new news. Like it or not, with volatility being shorted since 2003, hedge funds awash with cash, and ‘conundrum’ infecting various financial markets, price movements themselves are an important fundamental today.