Gold broke above $1300 an ounce on Friday and silver ended at a new 30-year high. Whether these gains are sustainable over the near term is impossible to comment on. What can be said is that gold is likely to remain in a long-term uptrend so long as the central banks continue to try and manipulate currency and asset prices, and/or the outlook for fiscal deficits remains worrisome. In other words, gold and silver today serve as both a hedge against the downfall of fiat money and the threat of major sovereign default(s).
The Demand Drivers
There used to be a time when the COT data was important; when the investor looking to buy or sell gold could study the data to glean excellent points of entry/exit. To say that the COT statistics have become completely irrelevant may be an overstatement. However, the recent data is definitely of little utility to the average investor. In the case of last week (as of September 21), commercial short interest as a percentage of open interest declined for the third week in a row and net small spec long interest barely moved higher even as the price of gold launched by more than $25 an ounce. If the small specs are not chasing rallies and the commercials are not looking to short the heck out of any large move higher, why bother to even look at the COT data? Quite frankly, the expectation of a commercial triggered wipeout in the price of gold (and silver for that matter) has all but vanished. This is not to say that forces will not pile on to try and trigger stops and/or manipulate prices when a pause in buying arrives, only that it is impossible to forecast such an event beforehand.
These points noted, if the commercials were to mount a historic short selling spree or start covering with reckless abandon during a major move higher (suggesting default or excessive fear), the COT may regain relevance....
Until then, the place to monitor what gold is doing is in the ETFs. These financial instruments - many of which own physical precious metals - continue to multiply and attract more investor attention. If you are looking for the main reason why COT is yesterday's news, look no further than the chart below.
While GLD is one of the most popular and largest gold ETFs, it is hardly alone. As per the World Gold Council's estimates, ETFs are the hottest game in the precious metals arena. Just imagine if some of these ETFs were not paper promises on gold that is secretly being leased out to the evil shorts... (my apologies to those who do not have an affinity for gold manipulation speculations).
Finally, there are the lease rates. This is an indicator that few talk about, largely because it will only prove its value once - or when the final motherload rally in precious metals transpires. Please refrain from screaming that negative lease rates are proof of manipulation in precious metals (why else would a central bank want to get a negative return from what it regards as a dead asset?)...I get it.
Gold Has Not Reached The Land of Bubble
With the COT data rendered useless and the decline in even the OTC derivatives suggesting paper is not/can not be used to manipulate gold lower, the investor is left with the ETF data. ETFs represent not only the most popular way for newcomers to enter the gold market, but also, thankfully, one of the most transparent.
As for some speculations about whether gold is in a bubble, it should be pointed out, first and foremost, that the onslaught of television/radio/newspaper ads encouraging people to sell their gold is not an indication of a bubble. Rather, when these ads start preaching to buy gold perhaps this line of thinking will make more sense.
Then there is the argument we hear every time gold rallies that prices are way ahead of themselves and a repeat of gold's historic 1980s bust is in the making. This argument is nonsense. To be sure, during the big move higher in early 1980 the price of gold fixed above $800 an ounce twice, and above $700 an ounce only 13-times. By way of contrast, gold has settled above $1,200 an ounce in each of the last 32-sessions (where is the 1980s like mania move?). Moreover, when gold capped off its rally in 1980 the metal rushed higher by nearly 70% in its final month! My calculator says gold today is up a mere 6.14% over the last month.
In short, assuming the great gold rally ends as many other major bull markets before it have, still ahead is a mad panic into precious metals that dwarfs anything we have seen in the last decade. The above drivers of the marketplace noted, the investor can await this day by watching the ETF flows. Until then, continue to own precious metals and, per the adage, buy the dips. The COT data Common contrarian sense says that we may be close to one...