COMEX open interest rose once again on Monday, by nearly 1%, to 375,875 contracts. And once again, this rise in open interest occurred on a day in which gold fell.

Thus, it’s a good bet that the shorts added to their positions again on Monday. And remember, these 2x short gold ETFs (GLL, DZZ, etc.) -- which appear to be the primary drivers of the short-selling in the yellow metal -- in the futures show up as “commercials” in the COT report, not “specs" - which is what they actually are.

Some are shorting gold because they’re dollar deflationists; others have a long oil/short gold trade on; some are shorting gold simply because they think gold is a put on stocks or that it only rises when people are “afraid." All of these are poor reasons to be short gold at present, and it’s the setup for a big squeeze at some point soon.

With gold having returned to its lows since the peak of 13 trading days ago, let’s once again revisit the case for a short squeeze in gold by looking at what happened during a prior squeeze. Typically, the gold price and COMEX open interest will go in the same direction for obvious reasons, but on rare occasions, they won’t - which typically indicates a building of speculative short interest. After comparing gold’s price to COMEX open interest over the past several years, the last time we saw a sustained rise in open interest (despite a sustained decline in the gold price) was curiously back in September.


Click to enlarge

As you can see from the chart above of gold vs. COMEX open interest, what followed that September rise in open interest, in the face of a decline in the gold price, was a 5-day, $200 short squeeze, when the gold price finally stopped falling and these shorts were squeezed. With the gold price in a downtrend at the time, though, and the financial markets seeing widespread liquidation, there weren't enough new longs to come in and keep the rally going once the shorts had covered.