Friday, May 18, 2001, when spot future Comex Gold spiked $US 13.80 for no "discernible" reason, is now almost 2 1/2 months ago. Four trading days before that, on Monday, May 14, total open interest (all active contracts) on the Comex had reached its low for the year at 105,490 contracts.
If you take a look at the spot future data for the week just ended above, you can see that on Friday, July 27, Comex open interest hit a new 2001 low of 105,070 contracts. This is the smallest open interest number on the Comex since February 2, 1993, when the number hit 104,150 contracts.
Between March 10 and July 30 1993, the Comex spot future Gold price rose from $US 326.90 to $US 407.00. Although Comex Gold did briefly exceed that July 1993 high in February 1996 when it reached $US 414, this brief period of less than five months represents the last Gold "Bull" market.
This brief Gold bull market in early 1993 came at the end of a more than five year long slide in the Gold price. Gold had touched $US 500 in December 1987, less than two months after the October 1987 stock market crash. By December 1992, Gold had sagged to $US 330, after an unrelenting slide (broken by two brief spurts in the lead up to the Gulf War of 1991) which had lasted for five years.
On December 22, 1992, Comex spot future Gold had closed at $US 333. On March 29, 1993, it closed at $US 333. Over that entire period of more than three months, Gold's trading range had been just over $US 6 - or less than 2.0%. On a spot future closing price basis, the "high" was $US 333.40 on February 10, 1993. The "low" was $US 326.90 on March 10, 1993. Consequent to that lack of "action", interest in Gold futures dried up, culminating in that open interest figure of 104,150 contracts mentioned earlier in this piece.
The drying up of open interest on the Comex in early 1993 was almost exclusively the result of the longs giving up because of the total malaise in the Gold price.
Please take a good look at the daily spot future Gold chart above. Note two things in particular. The first is the gradual drying up of open interest - to the point where it is now at its lowest level since the doldrums of early 1993. The second is the pattern of volume. Note particularly that the last two "spikes" in volume have come while the Gold price was going DOWN - not while it was going up.
If you look at the "volume spike" around the Gold price spike of May 18-21, you will see that it reached its highest point on May 30, the day that the Gold price completed its plunge from the May 18 highs. This volume spike was, almost exclusively, shorts driving the price down and then taking profits.
Each week, the COMEX publishes data known as the "COT" (Committments Of Traders) report. This report covers a period ending on Tuesday each week and documents the "reportable positions" of Commercial and Non-Commercial (ie speculators and "fund managers") on all contracts on the Comex.
The latest COT report - for the week ending Tuesday, July 24 - was innocuous. Gold was doing nothing and daily volume was derisory. However, as you can see on the data for the week above, Gold volume spiked heavily on Wednesday through Friday this week, and this volume spike coincided with two developments. First, the Gold price failed at the $US 270 level and retreated back towards its support area in the mid $US 260s. Second, despite this volume spike, open interest fell back to new lows for the year.
We won't get the next COT report until Wednesday, August 1. However, reports on trading during the "volume spike" of the last three days of the week mention three factors:
Open interest positions in Gold are back to lows not seen since 1993. The "malaise" in Gold has lasted longer and been far deeper than it was in the period leading up to 1993. The global financial situation is MUCH worse than it was at any time in the period between the end of 1987 and early 1993. The present bear market in Gold is longer (by about three months) than it was in the period leading up to early 1993. As long as current Gold support in the mid $US 260s holds, a breakout like the one in 1993 is simply a matter of time - and not too much time at that.
The term "bubble" is a useful one in financial analysis, referring as it does to any market which has seen prices blown up to disproportionate levels. But, in this context, what is the opposite of a "bubble"? We don't know of a convenient word to use, but if one wants to describe the present $US Gold "price", that is what we are seeing. How about an "elbbub"? Kinda catchy - don't you think?
A "bubble" has nowhere to go but DOWN.
As we have stated many times on these pages, Gold is UP in every major currency in the world this year - EXCEPT the U.S. Dollar and those currencies which are pegged to the U.S. Dollar. Across North America, Europe, and most of Asia, Gold has performed VASTLY better than stock markets in 2001. The one exception to this is the Dow. This year, the Dow is down 3.45%. Gold in $US terms is down 2.27%.
The best performing major "investment" so far in 2001 is the U.S. Dollar itself, but the Dollar is faltering, and has been for over a month. On a $US Index basis, the Dollar is up 7.19% this year. Three weeks ago, its gain for the year was 10.92%.
The U.S. Dollar is - by far - the most hyped "investment" in the world. Gold is - by far - the most denigrated investment in the world. Investors everywhere are betting everything they can beg, borrow, or otherwise cajole on the continuing "strength" of the Dollar, and on the ability of the U.S. Fed to resuscitate the U.S. economy.
The entire present situation is absolutely "tailor-made" for a "resuscitation", not of the Dollar or of economic "growth", but of the Gold price - IN U.S. DOLLARS - the ONE currency against which Gold has not - YET - recovered.
The Genoa G-8 Summit is now over, with nothing having been said by any of the participants about anything which is relevant to the present global financial situation. The U.S. and the world waits for August 21 - when the FOMC meets again and the world gets its next interest rate fix from Mr Greenspan and the Fed. In $US terms, Gold is still less than 6% above the 20 year lows it set in September 1999 and challenged in April 2001.
And now, there are DEFINITE signs that "paper Gold holders" on the COMEX are giving up in despair and liquidating long positions. The situation is "safe" with TWO strong support areas within $US 10 of the present spot future Gold price. It is also "primed" for an upside move, with Gold open interest at levels not seen for more than eight years. The period leading up to Labor Day, during which U.S. markets have suffered significant corrections in every year since 1997, is going to be FASCINATING. Stay tuned.
