Gold and The COT Short Position, U.S. Treasury Winds Down Money Market Funds Guarantee

I have been asked by a few readers about our thoughts on the COT short position in the Gold market. For those not aware, COT represents the commercial traders in Gold. Conventional wisdom states that if COT has a significant short position look out below. In our opinion this “wisdom” is incorrect. I would like to direct your attention to the chart above as well as the comments by Jim Sinclair below for a better understanding of the situation. Moreover, I would suggest using conventional wisdom during unconventional times is in essence a flawed approach.

As the C-wave began to accelerate from $439 on 8/23/05 to $692 on 5/16/06, commercial traders were heavily short. Their net short position as a percentage of open interest was -50.6% on 8/23/05. The lowest reading since 2001. Like August 2005, the time is right for the C-wave advance. When the time is right, price will follow. As of 9/15/09, commercial trader net short position as % of OI -49.2%. The most negative readings since 8/23/05.

Those advocating caution towards gold on the basis of commercial trader concentration on the short side, referred to as overloaded trade, ignore that gold’s strong advance from August 2005 to May 2006 developed from a similar “concentrated” position.

Thanks to a blog reader, I have received this information in response to my question last week about the expiration of the money funds insurance program set up by the U.S. Treasury.

From the Press Room of the U.S. Treasury:
Treasury Announces Expiration of Guarantee Program for Money Market Funds
Program Winds Down as anticipated, Generates $1.2 billion in participation fees for U.S. Taxpayers

The U.S. Department of the Treasury today announced that the Guarantee Program for Money Market Funds (the “Program”) will expire today. The Program was initially established for a three-month period that could be extended up through September 18, 2009. Since inception, Treasury has had no losses under the Program and earned approximately $1.2 billion in participation fees.

“As the risk of catastrophic failure of the financial system has receded, the need for some of the emergency programs put in place during the most acute phase of the crisis has receded as well,” said Treasury Secretary Tim Geithner. “The Guarantee Program for Money Market Funds served its purpose of adding stability to the money market mutual fund industry during market disruptions last fall and ultimately delivered a healthy return to taxpayers.”

Treasury designed the Program to stabilize markets after a large money market fund’s announcement that its net asset value had fallen below $1 per share (“broke the buck”) in the wake of the failure of Lehman Brothers in September of 2008. Maintaining confidence in the money market mutual fund industry was critical to protecting the integrity and stability of the global financial system.

About Bret Rosenthal

Interpreting the news that moves markets. Principal of RCM, LLC, and founding partner of the Fortune's Favor Family of Funds
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