October 16, 2007
Gold Eyes All-Time Highs
By Brady Willett

“The possibility of concerted sales of gold by central banks from the leading industrial nations was discussed at a secret meeting in Washington last Monday by deputy finance ministers from the United States, West Germany, France, Britain and Japan…” NY Times.  January 17, 1980.

Two trading sessions after the ‘secret meeting’ was noted above, the price of gold fixed at a record high of $850 an ounce. Commenting on the historic rally the Times noted, ‘These Are Very Troubled Times; Political and Economic Fears Combine’. Given the headlines making the rounds today déjà vu has arrived:

“Gold prices continued to shoot up yesterday, in the United States as well as Europe, amid continuing concern over Afghanistan, Pakistan and Iran.” NY Times. January 19, 1980

“Gold hits fresh 28 year high on rising Middle East tensions” Reuters. October 16, 2007.

It doesn’t take much imagination to conclude that today’s gold rally could best the record highs set back in early 1980.  To be sure, the U.S. dollar is currently weak, globally inflation is a threat, and geopolitical uncertainties abound. Moreover, and perhaps most importantly, the ‘secret meetings’ to date have, arguably, been focused on everything but the price of gold.

But what should be remembered about 1980 is that as the speculators started lining up outside of coin shops clamoring for gold, the record rally was over: By January 27, 1980 the headlines were singing a different tune, and it has taken more than 27-years to get back close to $800 an ounce.  The lesson is that when gold starts to rocket uncontrollably higher (i.e. $850+ or $1000+ an ounce today) and everyone and their granny (?) wants to participate in the rally, do your best to control your emotions.

“There were sighs of relief in Western finance ministries last week as the price of gold dropped by over $200 an ounce from the record high of $865…” January 27, 1980.



Is $850+ Gold Imminent?

Here are some COT facts:

- The commercials are currently holding a record high net short position and they have increased this position in each of the last seven weeks.
- Open interest is at a record high.
- The small specs (which usually arrive en masse just as rallies are about to end) are net long 38,749 contracts (futures and options). This total is a little elevated to conclude that another wave of chasers is about to arrive, although in recent history 40K has been breached on numerous occasions. 

As suspected the commercials tried to stop gold at $700 an ounce.  So far they have failed.  When studying the historical data the only conclusion is that a big move is around the corner (i.e. either all-time high gold as the commercials scramble to cover or a major correction back below $700).

Although any future and/or ongoing ‘secret meetings’ are not likely to be focused directly on the price of gold, such meetings will undoubtedly key on the U.S. dollar.  In short, and in an effort to keep the vague forecasting theme alive, a U.S. dollar bounce stops today’s gold rally in its tracks, but if no bounce arrives expect record high gold soon.

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