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The McClellan Market Report
Gold: A look at the COTs

McClellan Financial Publications, Inc
Posted Jun 19, 2007

Gold presents us with the more compelling story when we look at the COT numbers. The above chart shows that commercial gold futures traders have dropped their net short position to a very low level. This is the point in the telling of this story at which we always try to remind everyone that commercial gold traders as a group have been net short since late 2001, so our analytical task is to make sense out of the relative fluctuations in that net short position. The current low reading is the equivalent to what we saw back in October 2006 and January 2007, when gold prices were making pretty decent bottoms.

You will recall that we have been saying that gold prices should make a bottom next week, and this indication from the COT Report is not in conflict with that. The commercials' position being at an extended condition relative to recent values is simply a statement of the opinion of that group, a presumably smart group. It represents potential energy to fuel a strong uptrend in gold prices.

The same sort of potential energy is evident when we look at the "spreading" positions of the non-commercial traders. A spreading position is counted when a non-commercial trader simultaneously holds both a long and a short position in the same commodity contract, usually in different expiration months. Such positions are usually entered as a means of hedging portfolio risk, and so a high net spreading position is a sign that these large speculators are feeling the need to hedge their risk.

This week's reading is one of the highest ever, and is consistent with similar readings that were almost as high over the past few months. High readings like this are reliably associated with price bottoms for gold, so this high reading confirms what we are seeing the commercial traders say about the future for gold.

The author of gold's recent suffering has been the rebounding dollar. The commercials have been paring their net long positions lately, and the Dollar Index has come up to touch its declining tops line. Eventually the Dollar Index is going to break out of this declining wedge pattern, but we do not think that the break will come this month. If the dollar falls back, that would be helpful to gold prices in their effort to rebound.

Reminder: Tom McClellan will be operating from Brazil next week, so please maintain a high level of positive mental energy toward the patron saints of road warriors. We would not recommend, however, using holy water anywhere near your computer or fax machine.

Written Jun 15, 2007
McClellan Financial Publications, Inc

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