Strange Times in Gold Futures

The Gold Futures market is witnessing a very rare event...

WITH A MID-TERM election nearly upon us, the Fed all but promised more QE...? gasps notes Gene Arensberg at the Got Gold Report.

Wow, who knew?

Fed chairman Bernanke said Friday that "further action" (meaning more quantitative easing or QE) "may be warranted" due to high unemployment and lower inflation than the Fed wants us to have.

Yet interestingly we saw a bit of a bid for, of all things, bonds late week. It could be just a one-off short covering fluke, or it could be a signal we are nearing an inflection point (again). Either way, with gold having tested as high as $1387 an ounce, and silver having surged to within a dime of $25...and with the Big Miners attempting a breakout of previous 2008 highs, but not convincingly (yet)...while we also saw a late-week big jump higher in Gold Futures open interest on the Comex, we will once again be raising our short-term trading stops for both gold and silver.

These are strange times in the world of Gold Futures, and especially in the Commitment of Traders reports from the US regulator, the CFTC. As we told King World News last weekend, what we are seeing right now is rare. Because, with the industry-side commercial traders unwilling to use their trading advantage in the futures pit, this feels a lot like the 2005 or 2007 retreats by the "big players", when gold overran their big short positions. The commercials were even less aggressive on the sell side for silver, and now we are seeing buying pressure from both sides of the battlefield – the long side buying and the short side having to cover at ever-rising prices.

But while silver is still outperforming gold (which is usually more bullish than bearish for both), there's cause for caution. The Gold/Silver Ratio last week fell to a 56 handle for the first time since July-August of 2008. The US Dollar meantime came under material pressure for most of last week, but notice that ICE commercial traders in the money markets curiously reduced their net long positioning in the USDX – a small amount yes, but a reduction nonetheless

The greenback has been crushed lately. Raising some caution, therefore, notice the slight contraction in the High/Low spread of movements in the Gold Price. Another cause for caution, and definitely not a bullish signal short-term, in our view, is the new record-high open interest for Gold Futures on the Comex exchange, ballooning up to over 638,000 contracts.

Looking ahead, and with the central banks buying physical metal – and with all those underwater short sellers in the precious metals futures' market – we still think any significant dips will be well bid.

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