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On April 25th 2007, I wrote that gold bulls would be disappointed (again). Lets take a look to see what happened since then and what we can tell for the sector going forward.
I pointed to the Commitment of Traders report, which showed the “smart money” commercials being markedly net short. Since then that lopsided situation worked itself out.
On April 17th 2007, the commercials position was: long 79,882 and short 254,480, which is a net short position of 174,598 contracts. From the previous week (April 10th 2007) the commercials had reduced their longs (-7,564) and added considerably to their shorts (+13,830). Meanwhile, the small speculators were long 54,973 and short 15,733, for a net long position of 39,240 (on April 17th 2007).
Now compare that to the COT on May 29th 2007. The commercials had a long position 125,989 of and a short position of 244,684 for a net short position of 118,695 contracts. And the small speculators were long 57,428, and short 33,630 for a net long position of 23,798 contracts.
An important metric to watch for the COT is the open interest. Currently it is at 425,688 contracts, a 12 month high. Usually important changes in trend develop when the market is positioned lopsided (commercials vs. speculators) and when the open interest reaches significant levels. We saw this happen in late February 2007 where the commercials had been increasing their net short position while the small and large speculators were going more more long. With the open interest at around 415,000 contracts, things hit their climax and it started to unwind.
As well, the Rydex sentiment measure was flashing a caution sign. Considering also that the gold index fell to an area of previosu support, it wasn’t surprising to see it rally last week. It started with hammer on Wednsday and then two back to back long range up days:
Last week may have gotten the gold bugs rejoicing. But when you step back and look at the larger picture you see a very lackluster performance. Relative to the general stock market, the gold sector has lagged significantly. It is stuck in a wide trading range and is no where near break out levels. If it does approach the 370 level without looking too overbought and if the k-ratio is low enough, then I might change my overall outlook on this sector.
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