August 27, 2003

Gold Traders Up Their Net Long Position by 35% in One Week

O la they say here in France. The latest commitment of traders report from the Commodity Futures trading Commission shows that large scale speculators added 61 tonnes to their position in the last week. Shorts reduced their position by 12 tonnes for a net gain of 73 tonnes, or 35%. What have we here? Are gold speculators getting ready for another geopolitical bomb to go off? Are they spooked by the collapse in the bond market and taking the current stock rally as a chance to exit equities and get into gold? And what to make of the hedged majors who keep reducing their forward short sales. Looks to me like a whole lot of folks are tying their lifelines to gold and getting ready for a firestorm in the credit and currency markets. Then again, this could be gold speculators getting over eager. However I suspect what you're seeing is a realization that derivatives contracts based on mortgage backed securities or even the U.S. Treasury markets itself are falling out of favor as a way to hedge against a risk. With the GSEs (Fannie and Freddie) rocked all summer by internal problems that still haven't been fully disclosed, no one wants to be a counterparty to a risk that's getting increasingly dangerous. Gold, on the other hand, at least the physical kind, is no one else's promise to pay. It doesn't represent a debt or an obligation. And that's why it's a reliable source of value when paper gets crumpled. There is an irony, of course, that speculators are looking to make money in the gold derivatives market based on gold' standing as a real, tangible store of wealth. But for investors wondering if and when Wall Street as an institution is going to be scared enough of Fannie and Freddie to get behind gold, the huge increase in net long gold is an encouraging sign.


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