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Last week saw most commodity prices rally as investor sentiment reacted positively to economic conditions. The gold price didn’t really move much, but, under the surface, big things are still bubbling which could have big repercussions.

The Gold Bugs Index (HUI) is up 5.10% from the start of the year.

The SPDR Gold Shares (NYSEARCA:GLD) is up 5.71% from the start of the year.

Combined Exchange Traded Fund gold holdings were 65.41m ounces (July 22). This is down 415,127 ounces from the week before, but up 8.71m ounces from the start of 2010.

Gold prices traded below $1,180 last week but received strong demand as bargain hunters and short covering buoyed the price. It briefly broke through $1,200 twice on Friday. Once in the afternoon hours of Hong Kong trading and the other just before the New York open.

Once the Comex opened in New York an all too familiar pattern resumed and the gold price got beaten back down below the $1,200 mark. After the London PM fix was in it dropped further to close for the week just shy of $1,190.

Investors that watch the gold price closely will note the timings. Most of the action in the gold price occurs when the Comex opens and shortly after the London gold fix is in. Could this be the work of the bullion banks?

Here’s the last three days spot price overlaid (the green line is Friday’s). You can see that the price action revolves around the same times – when the Comex opens and just after the PM gold fix.
Gold Spot
The Commitment of Traders (COT) report and gold positions

A look at last week’s COT report (which shows a breakdown of each Tuesday’s open interest for markets, and is released on Fridays) shows the large commercial traders (including the bullion banks, large dealers and swap dealers combined) reduced their net short gold positions by 13.2%. That’s a big figure.

Such a large number has stirred commentators. People are pointing to the Dodd-Frank Financial Reform Bill as a possible explanation. Others are suggesting a change in mentality – that the sellers are starting to think the price will not go much lower.

Commenting on Friday’s commitment of traders report, Ted Butler notes...

“We have a position now in gold where they’ve (commercials – which is where the bullion banks hide) taken out 75000 contracts net... in three weeks... the 75000 in gold represents 7.5m ounces of gold. That’s about $9bn worth... These are big, big declines big three week declines. Some of the biggest on record.”

Ted’s bullish 80 - 85% on gold and 100% on silver. Listen to his interview at King World News here.

Summary

The huge decline in short positions is a bullish indicator for silver and gold prices today. And it is certainly interesting to speculate as to the possible explanations. But we can’t help but be realists. And because the gold price has traded in a narrow range for a while we believe it’ll take something big to change this. Whether that be movement in the IMF sale, some fundamental change in the value of the dollar (for which we note there’s been no correlation to gold of late), or signs of strength/ weakness in economies.

Disclosure: No positions

Source: The Commitment of Traders Report and Gold Positions