Friday, January 28, 2011

Spread Trades – Open Interest Evaporate on COMEX Gold

HOUSTON -- Quick notes as we are looking over the data in preparation to begin this week’s full Got Gold Report, which we are planning for late Sunday, early Monday at the latest.

The second most interesting chart that jumps out from the disaggregated trader data published by the CFTC this week has to be the evaporation of the Managed Money spread trades for gold.  Here’s the chart.


Source for charts  CFTC for COT data, Cash Market for gold.

That is a one-week plunge in the number of Managed Money spread trades of 55,523 contracts, from 63,507 to 7,984 spreads open. 

The third most interesting chart (to us) has to be this one:


From Tuesday to Tuesday the total open interest on the COMEX for gold futures plunged 81,785 contracts from 587,832 to 506,047 contracts open.  By Thursday, the open interest had fallen to 488,926 contracts open, the lowest gold open interest since March of 2010 (482,786 open then) with gold then in the $1,130s. 

We believe that is indeed the largest one week drop in open interest for the COMEX gold futures contract between COT reporting dates ever.  We are certain it is the largest since 2000, with the now second largest Tues/Tues drop in open interest we can find having occurred on April 1, 2008, a big plunge then of 52,800 contracts with gold trading in the $880s. 

By now just about everyone knows that the cause of the big drop in open interest was due to a small hedge fund closing out an amazingly large number of spread trades relative to the total “line” of a reported $10 million. 

One of the better stories on it was by WSJ reporter Carolyn Cui at the following link: (May require a subscription.)

Clip: “A huge trade by a tiny hedge fund has sent shudders through the gold market.
Thanks to the nature of futures trading, Daniel Shak's $10 million hedge fund held gold contracts valued at more than $850 million, more than 10% of the main U.S. futures market, and the equivalent of South Africa's annual gold production."

We wonder if the CFTC and the CME realize just how bad a story like this one appears to professional traders.  And how about to ordinary folks and non-traders?  It sort of gives new light to the term “accountability limits” doesn’t it?  How did a fund with as small a “stroke” as SHK Asset Management manage to control so large a portion of the spread trades in that first graph above? 

At least Mr. Shak had the good sense to exit before his spreads wiped his fund out completely, or worse.  Shudders indeed.   

We are saving the chart we found most interesting for the full GGR, but we thought our readers might be interested to see the graphs above while we prepare that report.

That is all for now, but there is more to come.


The Original
Vulture Speculator

Trading gold, silver and mining shares since 1980 with a focus on taking advantage of volatility extremes, Gene Arensberg analyses the markets through a basket of technical and fundamental indicators and shares his findings from time to time here at Got Gold Report. Mr. Arensberg has been quoted in the Wall Street Journal, Dow Jones MarketWatch, USA Today and dozens of other news organizations.

"I've been a huge fan of Gene and his amazing work for years..."

Brien Lundin, CEO, Jefferson Financial, Host of the annual New Orleans Investment Conference and Publisher of Gold Newsletter

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