Fireworks ahead? Richard Russell Dow Theory Letters Sep 8, 2003
Extracted from the Sep 6, 2003 issue of Richard's Remarks
--When do people put out shorts?
They put out shorts when they think a market has risen too far, too fast. In other words, they put out shorts when they believe a market is vulnerable and ready to decline.
When you put out shorts, you are creating supply. You sell a thousand shorts in GM, and you are creating a supply that someone will buy. So certain interests may put out shorts to stop a market's upward progress. They do this by creating supply. They are hoping that by increasing supply they will overwhelm the buyers and drive prices lower.
Or -- you might put out shorts because the item you're dealing with is suddenly in demand, and at the moment you don't have enough supply. This could be an operation by a bank or a gold mine or what have you.
Now check out these amazing figures. These are the number of shorts that have been put out by the Commercials, which are gold banks, or jewelers who use large quantities of gold or possibly some mines, possibly some large brokers.
August 5 --- 145,598 shorts in gold contracts listed on the COMEX.
August 12 --- 151,016 thousand shorts in COMEX gold
August 19 --- 174,211 gold shorts
August 26 --- 184,612 gold shorts.
Sept. 2 ------ 209,840 gold shorts (highest in a year).
Question -- What are the Commercials doing? They've shorted the hell out of gold -- yet gold continues to climb. The Commercials are correct in the great majority of cases. But what's happening here?
Honestly, I don't know.
But I'm wondering.
All this new supply of gold (coming from the shorts) has to be bought, otherwise gold will cave in -- break down in the face of this increasing supply. But so far gold has been rising against the persistent shorting by the Commercials.
So here's what I'm wondering. Could the commercials be misjudging the market -- could they be putting out shorts in the face of a strengthening primary bull market in gold -- a bull market that's out of the control of the Commercials?
We know that in a primary bull market on Wall Street, a rising short interest is "dynamite." It almost always ensures that the stock market is going higher. The force of the primary bull trend literally "eats up" the shorts, driving them to cover at ever-higher prices.
And I wonder, is this what's happening to the Commercial shorts in gold? Is the buying of gold and gold futures so strong that it is "eating up" all the shorts that the Commercials are putting out? After all, the Commercials have been increasing their shorts for five weeks, and on the latest count the Commercials have boosted their shorts to a huge 209,840 thousand contracts, the highest level of the year -- and yet on Friday gold closed up 4.70 on the December contract to 378.80, its highest level in seven months.
So is this one of those very rare times when the powerful Commercials are battling a force even stronger than they are -- that force being the primary trend of the market in gold?
I really don't have the answer to this one, but if the Commercials have misjudged the situation, you can expect fireworks in the gold market coming up. But remember, the Commercials have huge resources and are very seldom wrong. Let me put it this way -- it's a fascinating situation, and if gold doesn't start to weaken very soon and thereby serve the Commercials -- then watch out.
Final question -- Why are the Commercials putting our so many shorts? Are they simply making a "play" against gold, trying for some short-term profits -- or is there some deeper reason why they want gold lower? I don't have the answer to that one. The Fed and the Treasury say that they take no part in manipulating the gold price.
Gold is possibly the most emotion-charged of all investments. Believers in gold state that only gold is real money, and that fiat currencies such as dollars are created in direct violation of the United States Constitution. They further state that gold has outlasted every paper currency that has ever been created. Thus, those using paper currency as savings are being systematically and methodically cheated in terms of retained purchasing power.
The central banks hate gold because gold means discipline. Gold in the system interferes with the ability of the central banks to create currency "out of thin air." It takes away the banks' power to inflate.
The public is, in general, oblivious to what is happening and to what is being done to them. The public doesn't understand money, and it doesn't understand gold. The public tends to believe what the government tells them -- which, when it comes to money, is as little as possible.
