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The Commitments

Here is an extract from commentary posted at www.speculative-investor.com on7th September 2003:

If you take a look at the long-term chart showing the net-position of Commercial traders in COMEX gold futures at http://www.cairns.net.au/~sharefin/Markets/Charts/COTAU.htm you'll see that the Commercial traders, as far as their positions in the futures market are concerned, are almost always on the WRONG side of the major price trend. For example, the Commercials were relentlessly net-long gold futures during the bear-market years of 1996-2000 and have been relentlessly net-short since April of 2001. Furthermore, as the gold price has trended higher since April-2001 the commercial net-short position has also trended higher. In fact, on 2nd September (the cut-off date for the latest Commitments of Traders Report) it was at an all-time high of 164,000 contracts.

A commercial net-short position in gold futures shouldn't, therefore, be construed as being bearish for gold. What an extremely high commercial net-short position (and correspondingly high speculative net-long position) does mean is that when a trend change eventually occurs it will be followed by a substantial decline. This is because speculators will rush for the exit once important support levels give way and there will be a lot of speculators trying to fit through a relatively small exit. However, the size of the commercial net-short position gives us no information as to when and at what price level a trend change is likely to occur.

The huge commercial net-short position in the gold futures market supports our view that the next peak in the gold market will be followed by a correction that will be much longer and deeper than any of the other corrections that have occurred over the past 3 years. It doesn't, though, mean that the gold price can't move up to $400, or $450, or even $500, before a peak is put in place (we will certainly be surprised if the peak is below $400).

Interestingly, while the Commercials currently have a large net-short position in gold futures they also have a large net-long position in Swiss Franc futures. This, in turn, supports our view that gold will peak before (perhaps months before) the US$ bottoms.

As an aside, the commercial net-short position in the gold market is mostly offset by a net-long position of around 120,000 contracts accumulated by large speculators. This net-long position represents about 12M ounces of gold, or about US$4.5B of gold at today's price. In the grand scheme of things this is not a lot of money (there are many individuals in the world who could easily put together $4.5B to purchase gold). Now, the reason that it is generally not possible to squeeze the Commercials is because their positions in the futures market are usually just a hedge against their positions in the cash (physical) market. However, at the present time it is extremely unlikely that the Commercials have 12M ounces of physical gold at their disposal, so what happens if the large speculators that have built up the 12M ounce net-long position decide to demand delivery of the gold? In this case the Commercials would either have to step into the market to buy the gold or get bailed out by central banks. The point is; if the large speculators are well financed and have a lot of conviction then they, not the commercials, have the upper hand because they have the ability to demand delivery. The large specs might have no intention of demanding delivery but we would certainly not want to be short gold right now.

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