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August 22, 2005

More Gold COT Propaganda
by Mark Taylor

I like that.... propaganda. It is a means of furthering one's cause or defeating that of another. Propaganda is most often used when there is a cause to be supported and an opposing one to be discredited. If one were to review, it is evident that there is no opposing view or adversary discussed. That being so, an important element in the common use of propaganda is missing, an opponent. What remains is logically, my opinion on a set of data. I may offer my opinion to further a cause such as the achievement of fame, notoriety, or profit, but doing so should not detract from an analysis that is based on the historical and current positions held by market participants.

On the other hand, if I were to begin my article by stating that any writer, who uses the gold COT as a basis for a near-term price decline is a cheap, second-rate glory seeker, I have definitely identified an opponent. If I then follow up with an argument of my own, while flatly stating that the purpose of doing so is to prove a theory of mine, you better watch out speculator.....I am "Propagandist Extraordinaire". I'll take data from the oil COT, wheat COT, soybean COT, purposely (or unknowingly) leave out the distinct differences of positions held, tell you I'm a 20 year veteran, and again proclaim..... Any one that thinks otherwise is a cheap, second-rate glory seeker. So much for propaganda and opinions.

When I write something, it is my opinion of the near-term possibilities within a particular market. It happens that gold offers a decent potential for trading opportunities at this time so if you're a short-term speculator, this might interest you.

The Non-Commercial traders that have been jumping into the gold market have done so at an abnormally fast rate. When viewed in context with the price action of gold, COT data is helpful in recognizing whether or not the participants are gaining technically sound advances in price, or if the action indicates that a mini hysteria is taking place. Last week I reviewed both the COT data released on Friday, Wednesday and Thursday's open interest, and the price action surrounding that data. Obviously, if you read last week's commentary, it was my opinion that a fall in prices was going to occur, and that COMEX long positions were facing a slaughter. I said slaughter because the futures contracts carry a great deal of leverage and considering the low margin requirements at this time, it is very easy to go long 10 contracts shortly before a $10.00 fall in price.

On 8/15, 8/16 and 8/17 open interest increased by 17,598 contracts. However this increase was accompanied by falling prices rather than rising prices as had been the case the week prior. It must be considered that rather than a buyer initiating those positions, a seller initiated a large portion of those positions as the price was driven down $6.00 by the end of those three days. The 8/16 COT report reveals that the reportable traders are 4 to 1 biased in their positions. This level of bias has rarely been exceeded and more often than not has led to significant selling and price pressure.

All of the above data is the participation side of the equation, it tells us who they are, what they are doing, at what point they act, which group had set the trend, and which group jumped in, causing a reasonable and fundamentally sound advance to become hysterical on a near-term basis. At particular times, participant involvement can help one to identify the near-term progress of a variety of technical analyses. The COT reports contain a lot more data than just that which leads many speculators to claim ...."The Commercials are heavily long....time to sell!"

Zorro

Mark Taylor aka Zorro
dowtheoryproject.com