FSU Editorial: "Net Commercials and Gold " by James West 07/09/2007

NET COMMERCIALS AND GOLD
by James West
buythebottom.com
forever a student of the markets
July 9, 2007

GOLD � Technical & COT Analysis

After a secular bear-market that lasted for 20-years, gold has turned a corner in 2001/02, and is now in what looks like a secular bull-market. Over the last 5-6 years buyers of gold have enjoyed stellar gains as prices more than doubled.

But that was then, and this is now�so what can gold investors expect in the short to intermediate term future? This article will try to outline some potential scenarios, involving technical & COT analysis:

First of all, I think that most investors would agree that gold's major trend is pointing up. (If I lost you there, please refer to the Kitco chart above). And being aware of the big-picture trend is very important, however, for trading purposes it makes more sense to make buy & sell decisions from a shorter-term perspective. Still, the take away from the Kitco chart is that gold has had a huge run, and is now sitting at the top of the chart�s range. (Major trend = UP)

3-Year Weekly Chart

Now let's zoom in from the Kitco chart to this 3 year COT chart. We can see that in 2005-06 gold experienced an unsustainable parabolic move up, and since then it has been stuck in a trading range. This range has support at around $550 and resistance at $725. Gold has been in this range for over a year now.

Let's recap: the major trend is UP, and the intermediate trend is more or less SIDEWAYS. But now we have another indicator to consider: COT data. The orange and blue lines represent commercials and large-traders, respectively. What is interesting is that the orange line has been going up, which simply means that commercials are buyers in this market. Does this mean gold prices are headed higher? Well, let's take a closer look.

1-Year Daily Chart

When we zoom in once more, we see the short-term trend. From October-06 to April-07 gold was in an uptrend. (Higher highs & higher lows) Since April, however, gold has been trading sideways: in a range of approximately: $640 � 700.

So the major trend is point up, while the intermediate-term and short-term trends are - more or less - sideways. In terms of technical analysis, this would tell us to remain neutral on this market, unless it starts to break out of its short & intermediate-term consolidation patterns. In this case: the direction of the breakout would favor the upside � in the same direction as the major trend.

COT Analysis

The analysis for gold does not end there. Trend is crucial in determining the gravity that governs these markets, but it is not the only indicator. Yes there are hundreds of others signals/indicators, but most are just derivatives of price/volume. COT analysis is unique because it is not a derivative of anything.

From the 1-year daily chart, we see that commercials have been buyers of bullion for the past 2-months, as gold prices pulled-back. From a commercial perspective, this is a very bullish setup that forecasts a bottom for gold in the near-future. Furthermore, notice that in May of this year when gold bottomed at around $640, commercials were buyers of the decline. Fast forward to today, gold is slightly above $640, yet commercials are much more bullish on gold today, than they were back in May. To sum it up: Commercials are buyers of gold, because they expect higher prices in the future. To what extent gold rallies and for how long is uncertain, what is for certain is that smart-money is accumulated bullion at the current price levels.

If we break and hold above $660, that would signal that the current correction is probably over. When/if we break above $690 - would turn the short-term trend back up. And the intermediate-term trend will turn up as soon as break above the 2006 highs at around $725. And if that happens, the major-term uptrend will be confirmed.

How high we go from there, is anybody�s guess: from a fundamental perspective, there is just so much going on in the world these days, that it is anybody�s guess. But before we get ahead of ourselves, we must always challenge our assumptions. If gold is going higher, then it would not make any sense if we saw the short, intermediate, and major-term trends turn down. There is very strong support for gold at the $640 level. Below that there is support at $600, and finally very critical support is found in the $570 range. On the upside, there is strong resistance at $690-700, and then at around $725. Once above $725, if we clear resistance from the late 1970's at roughly $750 � it is pretty much clear skies from there.

Contact Information
James West
www.buythebottom.com
Toronto, Ontario, Canada
Email: westjam @ gmail.com (Remove the space before and after @ when sending your email)