Dan Norcini: Gold and Dollar Market Summary

Latest on gold from Jim Sinclair's Mineset.

Friday, July 27, 2007, 6:27:00 PM EST
By Dan Norcini

Gold and Dollar Market Summary

Dear CIGAs,

I mentioned last week that the commercial shorts (aka the perma gold shorts or the bullion banks) would have to absorb a tremendous amount of buying to keep gold from surging to $700 since the fund net long position was comparatively small by recent historical standards. Well guess what? They did exactly that.

As you all know by now, the COT data only includes the action from Wednesday of the previous week thru Tuesday of the current week. If you recall, on Friday of last week and Tuesday of this week, gold had strong upside price action in which it ran to $687.50 on Friday and $688.40 on Tuesday. In both cases it was pushed down by the close just shy of $4.00 from the intraday high by aggressive selling which literally ate through the huge influx of incoming bids. Friday alone witnessed a massive increase in open interest of nearly 17,000 contracts – an almost unheard of number for one day with Tuesday’s surge higher being met with an additional increase of nearly 7,000 contracts. Clearly, some powerful entity was opposing the price rise with a vehemence that has not been seen for some time.

Those of us who have seen this drill for the last 6 years know exactly who that entity is and it was again confirmed today as the COT data was released. Once again, the INCREASE in the new shorts came from the commercial category, which by and large are dominated by the bullion banks. That group alone added a whopping 29,327 new short positions. Folks – this is the LARGEST WEEKLY INCREASE IN THE NUMBER OF NEW SHORTS IN ONE WEEK’S TIME since June 2005!

In other words, this same group, which was determined to hold the gold price under $450 two years ago and threw everything but the kitchen sink at it back then, apparently felt the need to ensure that the gold price did not reach the magical $700 level this past week. Even last year’s surge in May which saw the price of gold blast through the $730 level did not engender the amount of new selling by the bullion banks and their friends. Clearly someone is extremely concerned about a rising gold price given the current economic environment and the implications that such a price rise would raise.

One thing that I might mention to provide some solace for the friends of gold – yesterday’s collapse in the gold price come on the heels of the largest volume traded for a single day on the Comex that my records going back 6 years indicate. Nymex reported a mind-numbing 257,914 contracts traded hands yesterday during the rout that hit the gold market from the fallout of the rush into liquidity. That is humungous! The good news for gold’s friends is that such huge volume days that occur either on the way up or the way down typically tend to portend exhaustion waves when it comes to the futures markets. During such times, blind panicked buying or selling is the order of the day. People want out at any and all costs and simply do not care about anything else except to “GET ME OUT!” In the case of yesterday, it was terrified longs bailing out in droves. The result was a SHARP DROP in the open interest of nearly 20,000 contracts. The previous day’s down leg was marked by a drop of 15,000 contracts. In just two day’s time, we have cleaned nearly TWO MONTH’s worth of buyers since that is the last time open interest was near the current levels.

Again, while I hate to be prematurely optimistic given the current climate of fear and confusion, it is difficult for me to see how much more downside is left in the gold market especially seeing how well it held up today after yesterday’s exhaustion day. Even as stocks continued tanking later this afternoon, gold held rock steady. Just as what happened yesterday, its price descent down into the lower nether regions of the mid $650’s brought out strong buying which took the market back up into the plus column at one time during the day. Not too bad all in all considering how the currency crosses were getting whacked today and how the dollar was experiencing another dead cat bounce.

While the gold shares did not fare as well being caught up in the general market downdraft, the bullion price appears to be making an attempt at stabilizing here. I repeat from yesterday – I am of the opinion that the metal will lead the shares out of the bear’s woodshed.

Stay tuned as we all watch history unfold. What stories we will have to share with our children and grandchildren about these days!

Dan

Click HERE for charts (in pdf) with commentary by Trader Dan Norcini

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