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I had to look at the data twice before I believed it: In the latest COT week spot gold declined by $43.90 an ounce and the commercials added 2,849 contracts to their net short position (futures & options). To repeat: gold suffered its worst weekly decline since the gold bull began and the commercials added to their net short position. Shocked is the only word that comes to mind.
Two weeks ago I was looking for a period of aggressive commercial short covering to mark a potential bottom in gold. Today I would not be surprised if the price of gold retreats below $500 an ounce in the coming weeks.
As for all the talk about the ‘worst’ being ‘over’ in the global financial markets, a few volatile weeks does not erase the fact that most major asset classes had exceptional run-ups leading into May 2006. When looking at the 52-week percentage gains/loss on a broad mix of asset classes it is clear that the ‘worst’ has not even begun.
To reiterate previous sentiments, gold, the strongest performer highlighted below, is trying to make the transition from inflation hedge to crisis hedge. One can only assume from the latest COT data that the commercials believe the Fed will temporarily save the dollar and sacrifice the US economy in the process. Precious metals may only perform well in a recession if severe deflationary pressures develop and/or a financial crisis leads to a loss of investor confidence in the US Dollar. I don’t see stagflationary pressures having staying power. Rather, I think that commodity prices have peaked and that the US economy will weaken significantly in the coming months.
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