Monday, October 15, 2007

To The Moon, Or Bust

Well-well, well-well, well... Hmmm, that's a deep subject. Here we are this morning, it's the middle of October, and Gold is higher than we thought it would be. Or is it?

On September 20th I posted the following:

The mother of all short squeezes has begun in both Gold AND Silver. As prices rise, buyers become more anxious to buy forcing the shorts to bid up prices even higher to cover their shorts. The rising prices bring in even MORE buyers, and the Precious Metals markets become a runaway train fueled by increasing investor demand. The shorts get creamed...absolutely destroyed. Hallelujah!

Gold has reached the 735 projected move out of it's consolidation rectangle with amazing swiftness. Buyers are coming in and buying any little dip now. The shorts are being forced to cover at ever higher prices which have begun to put a floor under these prices. We may never see $600 Gold again. If you recall, in September of 2005 Gold broke the longstanding resistance at 456...and has not looked back.

Today Gold took out the May 2006 highs and set a new 27 year high for Gold. I suspect there may be another $25-30 of upside in Gold before we get a much needed consolidation. In the Big Picture this consolidation will seem brief, but a four week consolidation here may seem like forever. Be patient, Gold needs to catch it's breath before we get the go for "trans lunar injection" and a trip to the Moon. Silver will be the beneficiary of any profit taking in Gold as it remains 15% undervalued still. The more expensive Gold gets, the cheaper Silver will look to those that think they're late to the Precious Metals Party that Capt. Bernanke has so graciously picked up the tab for.

That May 2006 high in Gold was at 730.20 spot. $25-30 of upside would peg spot gold at 755-60. And that is where we are this morning. Can Gold maintain it's momentum here and continue to drag Silver higher? Well, I suppose with the Dollars continued abysmal performance both could go parabolic and never look back, but not if dem Rat Bastids have anything to say about it first.

Got Gold Report - COMEX Commercials All-Time Record Net Short Gold Futures

In the Tuesday 10/9 commitments of traders report (COT) the COMEX large commercials (LCs) collective combined net short positions (LCNS) increased 14,990 contracts or 7% from 212,031 to a new record 227,021 contracts net short Tuesday to Tuesday while gold metal turned in a net advance of $6.19 or 0.8% from $731.98 to $738.17 on the cash market.
COMEX commercial traders have never been so strongly net short gold, but they didn’t exactly back up the truck with an overly large one-week spike higher in new net short positions.

Since Tuesday gold tacked on another $11.58 for a Friday close of $749.75 on the cash market, which is $6.75 higher than the Friday before the last Got Gold Report two weeks ago.

Over the past week total COMEX gold open interest increased 19,071 to 458,936 total open contracts. Another record total open interest on a COT reporting Tuesday.

Long term October 2008 and beyond COMEX forwards added 6,463 contracts to 66,902 lots open, about 14.6% of open contracts which is still somewhat below average. So far we have not seen a telltale large spike higher in long forwards in other words.

As measured on COT report cutoff Tuesdays, in the seven reporting weeks since August 21, when gold was trading in the $650s and the COMEX commercials reported a collective net short position of 91,994 contracts, gold metal has advanced $80.39 or 12.2%. Over the same period the LCs have been willing to add a staggering 135,027 contracts to their net short positioning, an increase of 147%.

So as gold was still trading in the high $730s the LCs were betting in all-time record proportions that gold was about to pull back. Indeed there were at least two attempts at pullbacks over the past two weeks down into the $720s, but neither down impulse managed to gain any traction.

Repeating from the last Got Gold Report two weeks ago: “… the last time they (the LCs) set a record net short position, in October of 2005 with gold then trading in the $470s (not a misprint), there was a teensy pullback shortly after that down to the $450s (first week of November 2005) and the COMEX commercials managed to get the heck out of about 60,000 of those net short contracts just before gold took out the psychological $500 barrier on its 5-month, 59% romp higher to $730 in May of 2006. … So the last time the COMEX commercials were this confident of lower gold prices, they were very short term right, but they were long term very, very wrong.”

Is history trying to repeat? Were the meager dips down into the $720s all the pullback we are going to get to work with, or is there another, stronger dip yet to come? No one can say in advance, of course, but we can note one important difference between the two events so far. In the October/November 2005 LC record-net-short-small-pull-back event the LCs dumped a big portion (about 60,000 contracts worth) of their then collective net short positioning during the pullback. As of Tuesday, 10/9, the LCs not only have not dumped any of their net short positioning, they’re still adding to it. That suggests that at least they think a more intense pullback is coming.

Does that mean that we will see a much harsher pullback for sure? No, virtually anything is possible short term. The LCs could be dead wrong too, gold could even go parabolic from here, but it certainly does mean that the LCs need a pullback and will be gunning for one on any opportunity. Friday’s near high close of just under the $750 level also means that the largest of the largest gold futures trader’s net positions are currently underwater in a big way. And make no mistake about it, their net short position really is big, the biggest ever. How big?

Well, as of Tuesday 10/9 COMEX commercials had a net short interest in 100-ounce gold futures contracts covering an amazing 22,702,100 ounces of gold metal. That’s right, they were net short (betting against) over 706 tonnes, worth notionally about $16.7 billion U.S. dollars, almost as much as is held today in all global gold ETFs. As of Friday, virtually all of those net short positions were upside down so, to put it in street language, there are about 16.7 billion reasons why we might suspect that the LCs will be gunning for a more meaningful gold sell-down.

The trouble is for those bullion banks and very large commercial interests betting on the gold downside, further advances in gold can be explosive when they are breaking out to new highs, literally above all short positions and when momentum-chasing funds and so-called “hot-money” is flowing in. Interesting to contemplate, isn’t it?

A RECORD net short position in the Gold futures. And the record relates to the last record high which was set when? Sept. Oct. 2005. I know I keep looking back to 2005 to look forward today, but it never pays to "ignore" history.

The COT Report makes a fairly convincing case for caution for the Bulls here. Gold's technical picture supports that case, as does history. Seasonality however does not support the case for a "big" reversal here. Though always possible, that seems to be becoming less and less likely as the month of October meanders along. It would appear that consolidation is winning out over reaction in Gold as the month continues to unfold. A move in Gold back to recent support in the 720s may be about all we get to call a sale price before prices move substantially higher. A lot will depend on how successful the COT traders can be here in there attempt to "bring Gold down". If history is any indicator, there success will be severely limited, and may even explode in their face.

Above I have posted above two charts, "FALL 2005" and "FALL 2007". On them I attempt to show my "technical" reasoning for why I have maintained a "reaction/consolidation" bias for Gold this month of October 2007. So far, Gold this month, has reacted very similar following the break of 730.20 as it did when it broke 456.50 in 2005. The break this month is being tested as it was then, and the RSI and MACD both show negative divergence, and a bearish bias.

As I predicted back in September, Gold has now moved $25-30 above the old May 2006 high of 730.20. I guess today we are in the Twilight Zone. It's be a crap shoot to guess what happens next. But the case has been made that "one more" opportunity may yet present itself to get your tickets for the Gold Ride to the Moon at a discount.

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