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October 8, 2004
Gun Shy Commercials Suggest New Highs In Gold
By Brady Willett

History doesn’t repeat itself, but - as the old saying goes - it often rhymes. In the case of gold, the jingle heard most often is ‘commercials pound gold lower.’ Indeed, for much the 1990s, and even during the current gold bull market, the commercials have religiously slammed gold lower by swamping the market with a massive short position at opportune times.  With this in mind, the big question today – with gold threatening to reach 2004 highs - is when will the commercials attack?
 

It has been speculated by some that the commercials are in cahoots with shadowing organizations such as the US Federal Reserve Board and major bullion banks.  Moreover, it has been suggested that producers such as Barrick have conspired with the likes of JP Morgan to rig prices.  Conspiracy theories aside, the fact is that the commercials have made profits by pounding gold prices because they fearlessly add to their net short position as prices rise (acquiring more leverage to profit on any decline).  Along with the above chart – which is the futures only – the combined futures/options data paints the picture: the commercials will hold/add to their short positions until gold prices start to buckle…always (at least in recent history) covering part of their position before the next major rally.


As has been covered before, while the commercials rake it in during price declines the speculators usually get crushed. Using a recent example, as net commercial short interest was reaching multi-year highs in April 2004 net speculative long interest was hitting highs not seen since 2001.  The end result was a fantastic price crash – from a high of $427.25 (Spot) to $375.00 – and the quick annihilation of more than half of the net speculative long position.  


When will the commercials attack?

The interesting thing about the above charts isn’t that the commercials always end up profiting while the speculators always lose money. Rather, it is that neither the speculators nor the commercials have made extreme bets on or against gold during the latest rally. Since the gold bull began rarely have the commercials and speculators both been so patient in adding to their positions.

What this trend suggests is that the speculators are cautiously accumulating gold while the commercials are waiting for the speculators to begin crazily accumulating gold.  To be sure, it is difficult for commercials to shake the market when the market is not being controlled by weak hands…

In short, it is doubtful that history will rhyme - meaning the commercials will try to pound gold - until the price of gold reaches new highs (or more speculators arrive to party). After today’s weaker than expected increase in payrolls – which for the fourth month in a row was not strong enough to replace the expanding labor force – gold rallied as the US dollar declined.  Fed McTeer said overnight that the US dollar must, eventually, decline.  Later today another important report will be released: the COT data. Yes, a 1987 style scenario for gold still exists...


“In 2002 and 2003 gold rallied to yearly highs in the month of December, and the U.S. dollar dropped towards the end of each year. Will 2004 offer up another December to remember?....The U.S. current account deficit is at 5.7% of GDP. The interest rate/dollar outlook is confusing to say the least. 1987 style confusion and dollar instability could be just around the corner.”
September 15, 2004 Price of Gold Eyes December 3-Peat on 87-Style Dollar Instability