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December gold launched above $700 an ounce today in what was one of the most interesting sessions of the year. The press reported that a weak dollar, near record high oil, and U.S. slow down fears were responsible for the rally in gold, while many bugs simply concluded the obvious:
Central banks are injecting money into the financial markets like crazy!
More money equals more inflation. That is the story and the bugs are sticking to it, and judging by the inability of central bankers to liquefy credit markets this story isn’t about to die.
If COT history is any indication (excel), today’s rally has legs: the commercials are (as of Aug 28) net short only 105,558 contracts (futures & options) and the small specs are net long only 24,707 contracts. If $700 is going to be held the commercial short position could easily double before the commercials give in. As for the small specs, expansion to 35,000+ net long contracts could be an indication of a stretched herd mentality taking hold (unfortunately we will have only dated data to go by until September 14, and by then the market will undoubtedly look very different).
These speculations aside, remember that $700 an ounce is the old $300 an ounce – or the psychologically important level that certain interests do not want to see permanently busted to the upside. In other words, there is very little knowledge that can be gleaned from COT data. The only question is whether or not gold is ready to take the next step. Although I am not convinced that it is, it is worth noting I am a long-term gold bug that is essentially watching rather than participating directly in today’s market. I don’t see any compelling reason to sell existing holdings or add to them.
Also of note today was the ‘alleged violation of Syrian airspace by Israeli warplanes’ (BBC). Speculations about gold rallying in response to weak USD notwithstanding, as the Syrian news broke gold jumped. An inflation hedge and a crisis hedge. How attractive! If only central banks didn’t hate rising gold so much…
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