How Long Can this Gold Rally Last?

But what does the smart money think? The Commodity Futures Trading Commission's Commitment of Traders Report shows that commercial traders and swap dealers are largely short gold and have added to their short positions the week of August 9. Producers and manufacturers were long 29,067 contracts but short 165,875, while swap dealers were long 32,598 contracts and short 208,731. Only managed futures funds were primarily long, with 281,496 long contracts compared to 36,244 short.

But George Gero, managing director at RBC Wealth Management and long-time COMEX gold trader, notes that open interest — open contracts — has dropped significantly since the end of June, from 622,000 to 575,883, down 7.4%. Funds are underinvested, says Gero, adding if the price of gold hits $1365, asset allocators and funds will be buying, pushing prices even higher.

He sees the yellow metal hitting $1400 per ounce by the end of year with no major down moves unless the Fed raises interest rates. But Gero warns about investing in gold mining ETFs because he says much of the gains are due to company cost savings as a result of cheaper crude prices.

Doug Eberhardt, author of Illusions of Wealth, blogger and broker of precious metals, also sees $1400 as key level. "My secret indicator is the phone ringing [at his office], and the last month has been nothing like May and June. Last week it picked up a little which means we could shoot up over $1400 with one last hurrah. The dollar is still key and both gold and silver have been almost perfectly inverse of the dollar lately."

–Related on ThinkAdvisor:

• Gold Now in a Long Bull Market, Analysts Say
• In Defense of Gold as a Defensive Asset
• Gold Funds: Better Than Bullion?
• What's More Precious Than Gold? Industrial Metals