Following the weaker than expected payrolls report the dollar was pummeled and gold and silver rallied. Given that the Fed may not be able to raise interest rates as aggressive as previously thought, many foresee the weak dollar/strong gold trend continuing for some time. No disagreement here. However, unless - or more precisely until - the dollar collapses $400 an ounce may prove to be a formidable hurdle for gold. Why? Because the commercials have been attacking this psychologically important mark with vigor and great success.

To note: this is not to say that the commercials can somehow magically cure the pickle the Fed finds itself in. On the contrary, if Greenspan is unable to raise interest rates for fear of further economic retrenchment it is nearly universally held that the dollar will remain vulnerable. The commercials can not do much to change these facts of life.

However, what the commercials can do, and have done, is bide their time when gold rallies, and then swamp the market with short sales at the opportune moment. Case in point, when gold was nearing its January highs the commercials aggressively took their largest short position on record. The timing of this attack was, quite frankly, perfect.

Needless to say, with only 134,000 short contracts on the books today (as of Aug 3) the commercials are fully capable of adding to their shorts at any moment. With this in mind, last weeks impressively rally - which was capped at the $400 an ounce mark - could be an ominous sign.*. The last time the commercials attacked $400 an ounce in July it took less than two weeks - or a 41,355 jump in short contracts - to crush the weak hands (see "Mini Attack" below).

Will $400 an ounce be conquered more quickly than $300 an ounce?

On November 27, 1997 the price of gold fixed below $300 an ounce for the first time in more than a decade. Over the next 4+ years gold would try to regain the $300 an ounce level no less than 15 different times. The last, and perhaps final time gold fixed below $300 an ounce was on March 27, 2002.

On December 1, 2003 gold fixed above $400 an ounce for the first time since March 27, 1996. Less than 1-year since gold first touched $400 an ounce and there have already been 9 unsuccessful attempts to sustain this level (an unsuccessful attempt being a close above $400 an ounce that is followed up by any close below $400 an ounce).

Conclusions

In July the commercials showed the gold market who is boss [again]. To be sure, the commercials pushed gold below $400 an ounce, and the speculative longs have dumped with abandonment - the 22% decline in speculative long interest for the week ended Aug 3 marks the worst such weekly decline in more than a year.

A washout of speculative capital and a more 'bullish' positioning of the commercials (lower short/long ratio) suggested that gold was primed for a rally last week. However, the data, unless you were on the inside, was not released until after the week was already over. As is always the case after a sharp move in gold, the data is now almost useless.

As for the term 'bullish', it is worth remembering that the commercials have not held a net long position since December 11, 2001. * Although there remains the possibility that the commercials will go net long again one day, for now a positive outlook for gold is when the commercials are less bearish (i.e. last week's 1.89 short/long ratio has been a bullish number since 2002).

In short, for the newcomer in gold the old $300 an ounce methods of accumulation apply today using the $400 an ounce level. In other words, accumulate gold under $400 an ounce but do not buy gold much above $400 an ounce (or as the commercials start becoming too deep into the short game to do anything but sell more paper gold). As for selling your gold, this does not become an option unless - or more precisely until - the dollar collapses.