Monday May 21, 2012
Open Interest refers to the number of outstanding contracts on a futures exchange. We referred readers ti Jess's site last week where he noted the number of contracts was expanding. This morning a writer at Market Watch makes the same observation.
Let me explain. When the price of anything is dropping, there are more sellers than buyers. Which is to say there are more participants short than long, after all for every seller there has to be a buyer. Now when the shorts decide to exit, if that is all that is happening, the open interest would decline. This would happen as a result of buying their contracts back. There would be then fewer outstanding contracts. This however did not happen. The number of contracts has expanded. So net new buying has entered the market. This accounts for the move up in the price of gold last week.
He also notes that the HGNSI index has reached prior extremes rarely seen. This further supports our recommendation to go long GDXJ.
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