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I see a strong emerging uptrend in physical prices for gold and silver. There is now a huge short position built up by commercial shorts according to the most recent COT report. There are only two drastic directions for gold to head at the moment. Gold appears to be overbought and the indication by the COT report is that gold will be shorted down.

The opposing view is that a possible rate cut will force the USD into a weaker position bolstering gold prices. The COT report from October 16th, 2007 shows a greater than 3:1 ratio for commercial shorts compared to longs.

Here is the picture for gold from the COT report:


October 16th, 2007 COT Report

Silver is in nearly a precarious situation as gold with the commercial silver short to long ratio standing at approximately 2.3:1.

My guess is that if a rate cut occurs at the end of the month, the commercial shorts will be forced to cover their positions causing precious metals prices to erupt upward. This wont be your typical pop for gold and silver as the commercial short ratio is quite large.

Here is a note about COT option and future positions taken from this article:

The raw data analyzed below was obtained from the CFTC’s famous Commitments of Traders reports that it publishes weekly. These CoTs are data-rich and offer all kinds of valuable information on long and short positions that traders are taking in commodities futures. Charted over time, the CoT numbers help illuminate long-term futures trading trends that can affect commodities prices.

The official COT summary of options and futures for gold, silver and copper can be found here: http://www.cftc.gov/dea/options/deacmxsof.htm

Source: The COT Report,, a Rate Cut and a Potential Short Squeeze