The holiday delayed COT numbers were released yesterday. As anticipated, and reflecting the nearly $10 rally in gold for the week ended November 9, net commercial short interest rose along with net speculative long interest. Open interest increased by more than 54,000 contracts and settled at the second highest level on record.

Escalating open interest is usually bullish for the price of gold. To be sure, the dramatic swings in open interest since the Washington Accord (Sept 26, 1999) have mirrored changes in the price of gold.

That being said, open interest trends are not always an accurate indicator of short term prices. Rather, in the short term escalating open interest can be an indicator of market tops. Such was the case earlier this year when open interest surpassed 515,000 contracts on January 13, 2004, and again when open interest open interest remained at historically high levels from March 23 to April 12.

The lesson when studying open interest trends is that no single rule of law applies. Instead, escalating open interest is usually bullish for the price of gold, but only if even higher open interest arrives tomorrow. As for rising open interest being a reliable contrarian indicator - as the action in early 2004 suggests - the highest open interest total ever recorded was on Sept 23, 2003, or when gold was trading at only $384 an ounce.

If open interest is such an ambiguous indicator of the future price of gold why pay any attention to it? Because extreme readings in open interest usually mean something important for the price of gold.

It is with today's extreme reading in open interest in mind that we can begin a Dickens-like debate.

It was the best of times

Gold is trading near 16-year highs and many people, including Richard Russell, believe that the 'second phase' of the gold bull has begun. During this second phase the average investor will become interested in gold, fund managers will add gold back into their asset allocation models, the evil commercials will be forced to cover their positions at significantly higher prices, and the U.S. dollar will teeter on the verge of annihilation. Buy gold now!

It was the worst of times

The commercials are carrying a net short position of more than 210,000 contracts (futures and options). The last time the commercials were this heavily short was on April 12, 2004, or when spot gold was trading at $407 an ounce. During the four weeks following April 12 the commercials lowered their net short position by more than 140,000 contracts and gold crashed by more than $30 an ounce.

Soon the commercials will spark a sell off, the small speculators will run to the hills, and the rest of the tech fund speculators will follow suit. Sell gold now!

So, What Time Is It?

GLD will soon be launched, China is dumping dollars, and the double deficits will bankrupt America!

Despite these compelling arguments/speculations, it is the core argument of the gold bull that is most enthralling: if the U.S. dollar is just beginning its descent - a theory that is threatening to become self evident - it stands to reason that gold (priced in U.S. dollars) is readying for another up leg.

By contrast, and to reiterate last weeks sentiments, the commercials are likely to aggressively pound gold lower if the dollar stabilizes. Accordingly, the best time to buy (more) gold is only after the mammoth commercial short stake dips.

In sum, 'the time' is still high noon -- "either the dollar crisis arrives soon or the price of gold corrects." As the showdown draws near the increasingly extreme reading in open interest ensures that the outcome will be that much more explosive.