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Record Gold Shorts May End in Pain

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Record Gold Shorts May End in Pain

bear-warningSpeculators continue to hold a record level of gold shorts, despite getting caught in a surprise short-covering rally on Friday. Short positions on the COMEX gold exchange have risen for five consecutive weeks, the longest such streak since March. Gold shorts hit all-time records the last two weeks.

However, like in many "sure things," the crowded long dollar/short gold trade could end up in a classic bear trap. Friday's $25 jump in gold prices were sparked when prices rose enough to set off a cascading series of short covering. Conditions could once again align to suddenly send gold sharply higher.

Gold Shorts a "Sure Thing"

It may seem a no-brainer, betting that gold will fall ahead of next week's Federal Reserve policy meeting. Every $1 drop in the gold price nets a $100 gain per short contract held by the speculator. As of December 1st, the Commodities Futures Trading Commission (CFTC) reported an all-time net short record of 17,949 contracts. That's a lot of "smart people" betting on a "sure thing."

Timing is Everything

gold-bull-and-bear-market

Those bets seemed to be on the money last week, as gold prices plunged to five-year lows before recovering. The celebrations were short-lived, as the European central bank on Thursday disappointed the market by not offering a huge increase in quantitative easing. This caught all the euro shorts out of position, and led to an explosion in the common currency. This sent the dollar downwards, which increased the price of gold. This led to gold shorts having to cover, which kept sending prices higher. Spot gold closed up 2.3% for the day, and posted a 2.7% gain for the week. This was the largest weekly rally for gold since September 18th.

Who's Whoming Who?

Of course, that could be considered a one-off event, something that will have no bearing on the interest rate increase next week by the Fed. The hedge funds and other speculators think so. They now hold a record 55.1% short position. This compares to just 17.3% short five weeks ago.

But, for all the talk about it being a "no brainer" to bet against gold, someone has to be taking the other side of these bets.

Enter the bullion banks. While hedge funds and speculators are piling into gold shorts, the bullion banks have also set a record position -- 64.2% long. Both sides are "betting the farm" on opposite sides of the gold trade.

gambling

So, who is right? Consider that the bullion banks have such an excellent track record on predicting the gold price, that many think they are manipulating the markets. Consider them the "house" in this little betting game. Who do you think has better odds, those betting on gold shorts, or the house?

Of course, if the bettors never won, no one would gamble. There's always the chance that unrest in Europe will cause the euro to tank, or that the dollar market hasn't fully priced-in an interest rate hike. There's also the chance that fears over (at most) a 0.25% interest rate hike are overblown.

In the speculation in short-term paper gold market, you pays your money and you takes your chances.

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The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.

About the Author

Everett Millman

Steven Cochran

Precious Metals Market Analyst
BS University of South Florida (2002)

A published writer, Steven's coverage of precious metals goes beyond the daily news to explain how ancillary factors affect the market.

Steven specializes in market analysis with an emphasis on stocks, corporate bonds, and government debt. He writes a monthly review of the precious metals markets for SurvivalBlog.com.

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