The new financial regulation bill made it into law last week and the Commodity Futures Trading Commission now has some teeth. Read this GATA article:

[1] http://www.gata.org/node/8854

Chilton is a vocal member of the CFTC and the upshot is they have 180 days to enact position limit regulations. What this means in a nutshell is that the extremely concentrated short position in silver by JP Morgan, and the highly concentrated short position in gold by 4 banks, will be under fire. In all likelihood, within 180 days or less, these banks will have to reduce their short positions.

That of course is good news, but it also means that these banks are more motivated than ever to take the price down so as to suffer the least pain. Now, if buying pressure stays high, the banks will do what they did over the last two weeks and start covering shorts in earnest, which has given some strength to recent price weakness.

See the latest Commitment of Traders chart:

[2] http://futures.tradingcharts.com/cotcharts/GC

If you go to this page you can see the COT charts for any metal, and silver in particular is a key one:

[3] http://futures.tradingcharts.com/metals.html

The way it looks to me is that they are starting to reduce their short positions, but there is a long way to go yet. I think this adds support to the idea that gold and silver might see some hard drops in the near future. The point is, if there is ever any market activity that causes a little loss of confidence in gold, the banks will do everything possible to bring the price down and run the stops lower. If they time it right, like they have over the years, it won’t be that hard to scare the small specs.

So be prepared to see some stomach-churning drops over the next few weeks. Summer weakness could combine with a big scare in equities to let these guys do their dirty business. If you agree, then there could be some great buying opportunities.

On the other hand, if buying pressure remains strong, or some kind of world event causes people to flee to gold, then we could see the short-covering rally of all time. There is nothing like time pressure to cause panic, even among professional traders.

The more likely scenario is that prices will weaken as these guys make every opportunity to get out at lower prices. My view of the most likely target is $1040, as that represents extremely strong support. If that is taken out, we could see $950 or even as low as $800. But in terms of likelihood, I think $1040 is a reasonable expectation.

The current bounce may be on its last legs. The Euro popped briefly on Friday but then sank as the details of the bank stress tests were absorbed. Here is a good piece on that:

[4] http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/7907600/Bank-stress-tests-too-little-too-late-says-City.html

Most likely the Euro has peaked at 1.30 and is headed lower. That could mean weakness in equities and strength in the dollar. And unfortunately, weakness in the Euro is not helping gold as much as I had hoped.

Some people see a possible rally in equities, from a contrarian perspective. But sometimes it just feels like a big move has to happen because of the combined weight of everything, including sentiment. I’m a big contrarian too, and to me the surprise factor will be about how big a drop it turns out to be.

The good news for gold is that it will probably bottom sooner than equities and 180 days from now the price could explode. Be prepared.