Tuesday, October 16, 2007

Keep One Eye On The Yen

The chart of the Japanese Yen above speaks for itself. It doesn't take a genius to see that the recent leg up in Gold coincides with the recent leg down in the Yen off it's August high. Therefore, the near term in Gold my hinge on the Yen's near term disposition. Ultimately, Gold is going to move higher regardless of the direction of the Yen, Dollar, or Euro, but that time has not yet arrived. Continued weakness in the stock markets should pressure those in the "Yen carry trade", and a rising Yen would result...along with a reaction in Gold. Well, in theory anyways. The ballooning short position on the COT is certain to exacerbate any move in Gold over the next couple of weeks.

By: Theodore Butler

This is just my speculation, but I still lean towards the third possible outcome, in which the dealers manage to engineer a sell-off, at least below the key 50 day moving average. This is the "normal" outcome. It is pure manipulation and an outcome I don’t necessarily favor, but it is the outcome we have seen in the past.
I get the feeling that the commercials may be employing the rope-a-dope. This is the strategy employed by the legendary boxer, Muhammad Ali, http://en.wikipedia.org/wiki/Rope-a-dope, in which he would let the other boxer punch himself out and grow tired before attacking. My sense is that the dealers may have allowed the tech funds appear to have run roughshod over them, as the funds establish increased positions at ever increasing prices and ever increasing unrealized profits.
While it is true that the dealers are now sitting with about the largest unrealized paper loss in memory in the gold market, they have also been increasing the average collective price on their shorts and may not be in as bad a position as it may appear. Yes, the dealers total open loss on the 150,000 contracts added since mid-August now runs about $500 million, but that is just over $30 per ounce.
If the dealers are still in control, they can rig the price to recoup the open $30 open loss without much difficulty, and then some. If there are forces that will cause the dealers to be over run this time, the $30 per ounce open loss will blossom into a loss of much greater significance. Time will tell who has the upper hand.

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