Dear Friends,

This week’s Commitment of Traders (COT) report gives us the details of the ongoing liquidation occurring at the Comex which has seen open interest drop to a meager 289,700 contracts as of the end of the reporting period from a peak that once reached 593,953 back at the beginning of this year in January. A washout of that magnitude is simply enormous. You would have to go back to June 2006 to see open interest in the gold at these levels.

One way I prefer to look at this is to say that more than 50% of the players who moved towards gold over the last 2 ½ years are gone from the market. What makes this even more interesting however is in June 2006, front month Comex gold was trading close to $585. This past Tuesday, with the open interest at the same level as that last week of June 2006, front month gold was trading at $730, a full $145 higher. Clearly, the rate of short covering that has occurred during this liquidation cycle was at a much higher rate than the rate at which these same shorts were put on. In other words, the shorts were more eager to get out than the longs were which is really saying something when we consider just how much hedge fund deleveraging and index fund redemption related selling has been occurring. When you have reports of unprecedented demand for gold bullion, shortages in the spot market, mints closing down sales, etc., as a short in the paper market, you simply no longer have any ammunition with which to bolster your side of the argument. You realize that you are flirting with the devil since the only thing you have going for you is long liquidation and that in and of itself cannot last indefinitely as even a paper market must eventually align itself with the real fundamental world. That alone is sufficient reason to take your profits quickly and do not tempt your luck. Greed that results in overstaying your welcome in a winning trade has done in many a trader and cut short their career. We saw today what happens to shorts who overstay their welcome in a market in which the fundamentals are pitted solidly against their positions.

Back to the details of the COT report for gold – The fund net long position actually registered a very small increase this week but this is not because of new buying on the part of the trading funds but rather due to a very large amount of short covering on the part of those funds who had decided to attack gold from the short side. They covered 6158 shorts against the liquidation of 5288 longs by their counterparts.

The commercials are more interesting - the bullion banks (the commercial shorts) did very little short covering this week compared to what they have previously been doing. They have been covering more than 10,000 shorts each week for some time now - this week they covered a piddly 801.

Clearly if you want to know who was doing the price capping at the $750 level last Friday, this Monday and this Tuesday- look no further than this group! Unfortunately for them, today they got buried as the buying from panicked short side specs along with new buying overwhelmed their line in the sand at that level. I expected them to try to make a stand at the $770-$780 level but the market ripped through that level without even missing a beat and ran all the way to $800 before the bullion banks could regain their footing.

What is important to note now is that gold has tripped several technical indicators into a “buy” mode and has also taken out several very important technical resistance levels. Things of such nature generally bring in technical based buying and with open interest so low and so many players having pulled out to sit on the sidelines, there is the potential for quite a bit of buying to come into the Comex should these folks decide to play that game again. I am most anxious to see the open interest numbers from today’s session that we will get Monday morning to see what might have transpired today. I do hope that we have seen an end to the drop off in open interest in gold as it is simply not possible to sustain any rallies for long without more new buying coming into the market. Maybe, just maybe, we have reached that point where the dreadful liquidation is over.

In the meantime, do not let down your guard or grow complacent because of a one day victory over the shorts. If you want to see a lot more of this, then continue to acquire the gold from the Comex warehouses by standing for delivery and taking it out of the warehouse. Nothing will unnerve the shorts more quickly and do more to undercut their confidence than to strip them of the metal and force them to come up with more of it to make good on deliveries. “Stand and Deliver or Go Home” should be the rallying cry of the longs to the shorts.

Technically front month Comex gold is now above the 10, 20 and 40 day moving averages. It closed right on the 50 day moving average. Both the 10 day and the 20 day have now turned upwards which will catch the attention of the trading funds. Next week will be both interesting and crucial especially since it is a holiday shortened trading week here in the US and that can bring added volatility as players move to the sidelines for a long vacation. We are also approaching that time of the year in which many traders simply close down their books and take off until the beginning of the New Year. That too brings a drop off in liquidity so there is potential for even more wild swings as we move into December, as if things were not already enough to give one a good case of vertigo.