Friday, February 23, 2007
The gold market is flying high, but it may need a parachute.
Gold is way up. Gold stocks are way up. Everything is bright and shiny in the metals market. But, before we go and get all bullish on gold stocks, take a look at this chart...
Gold and gold stocks have had a terrific week, but let’s keep the move in perspective. All that’s really happened in the precious-metals sector is that the stocks have moved back up to the top of their trading range.
When this happened last September, the gold bug community went nuts and cheered that we were on the way to new highs. Then gold stocks fell off a cliff.
When this happened last December, the gold bug community once again celebrated the inevitable move to new highs. And again, gold stocks declined to the lower end of the trading range.
And now, with gold stocks challenging the upper limit of the trading range, gold bugs are as giddy as five-year-olds on Christmas Eve.
A run at new highs may be in the cards. But, then again, maybe not.
Commercial short interest in gold is now at a level that typically occurs at short-term tops in the market.
According to a report from the Commodity Futures Trading Commission, the commercial net-short interest in gold futures and options is 177,000 contracts. That’s higher than the 172,000 net-short position we saw when the gold market peaked last May. And it’s higher than the 140,000 and 119,000 net-short positions that occurred during the September and December tops.
The CFTC report also shows that speculative traders are now net-long the highest position in gold futures and options contracts since last May.
So the commercial traders, who have the best track record for timing moves in the gold market, are aggressively short the metal. And the speculators, who have the worst track record for timing moves in the gold market, are aggressively long the metal.
Of course, it’s possible that the commercials are wrong, and the speculators are finally right. It’s also possible that the Oakland Raiders will win the Super Bowl next year.
But it’s a dangerous bet.
Best regards and good trading,
Gold and copper companies jump: Cumberland Resources, Southern Copper, Seabridge Gold, and Phelps Dodge all at 52-week highs.
Global ETFs hit new highs: Netherlands, Mexico, Brazil.