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Last week the commercials notched their highest ever net short position (as a % of open interest), and tech funds (or noncommercials) increased their net long position by 19.9% (or +24,811 contracts). These statistics continue to suggest that a correction in the price of gold is near, with the alternative being that the commercials will be forced to cover their shorts at a significantly higher gold price.
One area of the market I have not focused on in recent weeks is the small speculators (nonreportable position). This oversight needs to be corrected.
Today’s abnormally small net long small spec position could help explain why the commercials have been unable to trigger a sharp sell off in the price of gold. Why? Because with the shallowest pockets the small specs are prone to margin calls during sharp sell offs. In other words, the commercials may be having trouble igniting an investor rush to the exits during the latest gold rally because the small specs have been unusually absent on the long side of things since late 2004.
What the current small spec position may also help explain is why the price of gold has been unable to make a momentum driven charge to $450+ an ounce area. To be sure, the small specs usually show up to any gold party late, but have not shown up at all as of yet.
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With the commercials heavily short and clearly looking for any opportunity to drive gold lower, it may be dangerous to place too much weight on the small spec statistics. For that matter, since the introduction of new gold investment instruments (i.e. GLD) has undoubtedly attracted some liquidity away from NYMEX, it could be the case that the small spec COT statistics have been rendered meaningless. Accordingly, the real question is can the small specs be fooled into thinking gold is headed to the moon one more time?
I have my doubts, and instead believe that one statistic is enough to suggest that a gold correction is due before any serious attempt at new highs is made. In short, the calm in the small spec numbers does not override the frantic addition of gold short contracts by the commercials.
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