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The small specs have added 12,702 contracts (futures & options - Excel) to their net long position in the last two weeks, while the commercials have padded their net short position by a whopping 73,915 contracts. With October gold higher by 7.6% since August 21 these trends suggest that another battle is brewing between the commercials and small specs; a battle that will likely be won/lost depending on whether or not gold can hold the $700 an ounce level.
As strong has gold has been of late, it is disappointing that as the USD index breaks below 80 the price of gold has not moved even higher. Whether warranted or not, dollar weakness is being greeted by many as being a needed ingredient for global rebalancing and/or a net positive for U.S. companies and the U.S. economy. Suffice to say, dollar weakness has yet to spark investor panic, and if 2007 ended right now it has been a disappointing year for bugs.
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But 2007 is hardly over, and gold still has an excellent chance of breaking above last years highs.
In short, while it may be a great time to trade gold, it is a terrible time to buy gold. As gold moves above $700 an ounce and the USD index trades below 80, the contrarian conclusion is that a dollar bounce and gold correction is due.
The alternative to this speculation is that currency panic is imminent and/or the commercials will soon be scrambling to cover their massive shorts for losses (something they have only done with authority once since 2002).
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