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First the good news: The commercials have covered part of their net short position in each of the last 5-weeks.
Now the bad: The commercials are still net short more than 130,000 contracts (futures & options).
Excel
The pace of commercial short covering (as compared to open interest figures) did not quicken in the latest week. Rather, the commercials are still holding the same short position based as a percentage of open interest as they were when gold was $682 an ounce. This suggests that the commercials are braced for lower prices rather than covering their bets on the expectation that prices have bottomed.
Given that the statistics are current only as of Tuesday (or when gold was at $634 an ounce), next weeks data could tell a different story. Quite frankly, by the time next weeks story is told gold may already have put in a near term bottom. So is now a good time to buy? In a word, no.
The precious metals investor should be aware that the next major decline in the US dollar – which is one of the main ingredients needed for gold to rebound – may not necessarily happen right away. Bearish dollar sentiment was stronger in late 2004 than it is today, and the dollar managed to perform strongly for all of 2005. As for the fact that gold has delinked from its inverse relationship with the dollar, while this is true, it is a dangerous conclusion to invest upon. As anyone with a calculator knows, gold has also delinked from any relationship with the dollar during its most recent price crash.
The commercials have not aggressively covered their shorts. US dollar stability in the near term could continue to be a drag on the price of gold. Now is not a great time for bottom calling.
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