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“Precious metals traders looking for a reason to bottom pick gold need to look no further than COT, as commercial short interest probably neared the 20% buy-barrier yesterday.” June 27, 2007 5.5-Years of COT Says Gold A Buy
As it would turn out, commercial short interest (as a percentage of open interest) struck 17.5% on June 26, 2007 – or the lowest level in more than 3-years! Not surprisingly, this notable dip in commercial short interest coincided with a bottom in gold.
For the record, this is the third time in a row that the old ‘buy below 20%!’ rule has proven an accurate indicator of a bottoming price of gold (fourth in a row if you look as far back as May 31, 2005). The lesson, to reiterate, is that you can buy (trade) gold when the commercials are relaxed and covering their short positions for profits and/or when smaller investors are running for the hills.
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As successful as the ‘20% rule’ has been at calling bottoms, in recent years the COT statistics have been unreliable at calling tops. To be sure, although insider words and the gift of hindsight tell us that the commercials viciously attacked $700+ gold back in May 2006, remember that gold rallied strongly for 12-months before this top came to pass.
In short, the COT data has predicted another tradable bottom in gold, and the recent rally in gold has led to speculation that gold could soon test previous highs (Gold to test $720?). And although it is tempting to join in today’s ‘new highs’ chant, the currency markets will likely have to turn even more turbulent for a major gold rally to come to pass (assuming, of course, that currency volatility will be the main driver behind the next launch in the price of gold).
Unfortunately, the money masters may be more willing to expend energy on a U.S. dollar bounce rather than risk implementing a $700+ gold strategy at this time. In other words, if you are looking for a further break-down in the U.S. dollar to propel gold to record highs, it may be important to recognize that a USD break-down, much like the most recent bottom in gold, has already arrived.
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