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June 1, 2005
Commercials Seek Hiding Dollar Bear
By Brady Willett

“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.” April 13, 2005

The price of gold has fallen by more than 4% since April 29 and open interest has declined in each of the last four weeks. Although hardly a ‘wipeout’, this is still enough evidence to conclude that seasonal forces are again at work, and that everything is going according to the summer gold plan (or the previous speculation that the best time to accumulate (more) gold might arrive in late August before the expected historical uptick in open interest arrives in September). 

But before getting too excited it should be noted that the COT statistics are no longer warning of a gold price decline. Rather, with a sharp decline in tech fund long interest and commercial short interest over the last month COT suggests that gold is closer to a near term bottom than it is a top.  This action suggests that the price of gold may work through its 2005 lows well before August comes round.

It goes without saying that the above charts reflect gold bull market trends.  Should the Euro disintegrate and/or a financial crisis grip say China, it is certainly possible that the US dollar will become a temporary safe haven destination for capital and the gold bull will take a break. Any serious pause in the gold bull could render the above points of interest useless.

Commercials Double Down On The Dollar

The commercials carry the same type of investment approach when playing the USD as they do with gold.  In other words, should the dollar move against their position the commercials simply acquire a much larger position and wait for prices to turn the other way.  Such was the case in 2004 when the commercials went long the USD index on June 1, 2004 and continued to add to their position religiously for nearly the rest of the year. By the time the dollar bottomed in late 2004 the commercials had amassed a record long position, and were ready to reap the benefits of a dollar rebound.

If the above chart was for gold the investor would be wise to sell all of their gold immediately and await the usual fallout. However, with the dollar – a larger and much more sophisticated/complicated market – the commercials have not proven to be all-powerful.

With this caveat out of the way, there is really only speculation to be made: as the commercials continue to increase their record net DX short position a correction in the dollar index looms.  Why is this the case? Because the deep pocketed commercials are not likely to be coerced out of their position by an unagreeable market. Instead, the commercials have shown a penchant to double down when things do no immediately go their way.


With the Fed tightening up the faucet it is certainly possible that the price of gold will continue dripping lower.  With an uncertain investment world drawn to the growth attributes of the credit crazed US economy, it is possible that the dollar bear will stay in hibernation for some time.

Forgetting what is possible, it is likely that so long as the commercials are covering their gold shorts and adding to their dollar shorts that a long gold/short dollar outlook will remain firmly in place.


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