HardAssetsInvestor

Written by Brad Zigler  |

September 21, 2009

Gold: Who's Left To Buy?

Details

The active December COMEX gold contract stumbled Thursday and Friday last week in its attempt to better its March 2008 record high of $1,060 an ounce. Sellers lurked at $1,025 Thursday only to ratchet down to a $1,020 perch Friday. Spot gold, trading about $1.10 under futures, failed to rise above its high watermark as well.

That gold should take a pause to catch its breath after its breakaway move above $1,000 shouldn't surprise anyone. But the recent hand-over-fist buying by investors has got some traders concerned about further weakening.

The latest data from the U.S. Commodity Futures Trading Commission showed the net long position held by reporting speculators stood at a record-high 255,183 lots. Proportionally, 93.6% of open contract positions held by these traders were purchases.

Among speculators, money managers have turned almost universally bullish. Fully 99.6% of the contracts held by buy-and-roll index funds, together with trend-following managed accounts and institutional funds, are on the long side.

Money managers represent the largest contingent of traders obliged to report their positions to the CFTC; the net exposure of these funds makes up more than a third of gold futures' current open interest. The movements of these traders influence the gold market in more than one way.

For one thing, lots of professional traders take the current lopsided investment fund exposure as a symptom of toppiness. The question in their minds is, "Who's left to sell to when the funds' buying interest is exhausted?"

For now, there seems plenty of contracts on offer by others in the gold trading ring as commercials and swap dealers got even shorter last week. Even large noninstitutional traders and small speculators lightened up their net long exposure by taking some money off the table.

Open interest is still building in gold futures, so new traders are entering the fray. But, with every trader category getting shorter, and only money managers as net buyers, you've gotta ask yourself: "What do these guys know ... or think they know?"

Tread cautiously.

COMEX/NYMEX Gold (Dec. '09)

*Note: The monetary inflation rate is calculated daily and represents the change in our proprietary index over the last 12 months. We update long-term inflation in real time as well. Since 1999, the compound annual growth rate in our index is 5.1%.