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Despite the fact that a sharp rally in gold may still be in the cards before 2004 expires, last weeks COT data suggests that the commercials are not prepared to stand idly by while gold marches higher. This statement may, at first, appear to contradict last weeks take on the statistics - Gun Shy Commercials Suggest New Highs In Gold. However, an objective analysis of the latest COT report means that an update to last weeks take on the market is required. Put simply, the commercials are no longer gun shy...
For the week ended October 5 commercial short interest in the gold futures market increased by 24,628 contracts (or up 12.8% from the week prior). During the same time commercial long interest (futures only) decreased by more than 7,000 contracts. All toll, the net short commercial futures position (shorts divided by longs) jumped by 26%.
Turning to the combined futures and options statistics, net commercial short interest continued to climb, topping the 2.5 point mark. While there is no industry standard that accepts 2.5 as a bearish indicator, caution has been warranted whenever this mark has been broken during the current bull market.
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A final commercials statistic to consider is total net short interest divided by total open interest (futures and options). This statistic – which is not commonly used - tells us that the commercial shorts are controlling more of the gold market today than they did yesterday. This would be fine if the commercials were long and bullish, but, unfortunately, they are not.
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To put the above chart into perspective, the commercials rarely carry a net short position above 40% of the total open interest. When the shorts have carried a short position this high it has always been a good time to lock in profits.
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Conclusions
The most recent COT data clearly suggests that the commercials are amassing a larger net short position to attack the price of gold. Moreover, given that the price of gold has rallied since Oct 5, this weeks data – which will be current as of today when it is released on Friday – could show an even larger COT short position. With this in mind, why should investor’s expect gold to rally and/or not crash back below $400 an ounce?
Because the party the commercials like to gang up on (the speculators) has not been dramatically increasing their net long position in the market (as they usually do during price rallied). In fact, last week – even as the price of gold rallied strongly – net speculative long interest actually declined.
In short, the commercial shorts may not be in total control of the gold market for one reason: less than 10% of the gold market is being controlled by speculators (9.99%). Until the speculators carry more clout in the gold market don’t automatically assume that every rally is based upon speculative forces. Yes, duri |
