Saturday, January 22, 2011

Unusual COT Action, Bullion Banks Cover Shorts, Swap Dealers Hammer Gold

HOUSTON ( -- More unusual action in the positioning of the largest traders of gold futures in New York surfaced in the Commodity Futures Trading Commission (CFTC) Commitments of Traders (COT) Report released Friday, January 21. The report is for large trader positioning as of the close on Tuesday, January 18.  Gold closed Tuesday at $1,367.91, down $13.27 the ounce from the previous Tuesday. 

From the disaggregated COT data, it is pretty clear who was behind this week’s weakness in the gold bullion market, and it wasn’t the big U.S. reporting banks – this time.  Indeed, as spot or cash market gold was moving 1% lower for the week (Tuesday to Tuesday), the category of COMEX commercial traders the CFTC classes as Producer/Merchant/Processor/Users (PMs); the category of traders that we believe includes the largest U.S. bullion banks, covered or offset 16,173 contracts of their existing net short positioning, moving from 149,434 to 133,261 lots net short. 

Each lot or contract net short represents a commitment by the seller to deliver 100 ounces of gold metal at a future date and price certain if the buyer of that contract does not extinguish the obligation by settling the contract in cash ahead of expiration.  A net short position benefits if prices fall and vice versa.  Reductions in large commercial net short positioning add buying or upward pressure on the market.  

The CFTC reported there were 25 reporting sellers holding short contracts in the PM category for this reporting week, but it is known from the CFTC Bank Participation reports that a large fraction of the net short positioning is held by four or fewer reporting U.S. bullion banks.  It is generally known that the two largest of the PM commercials are JP Morgan Chase and HSBC, both prominent bullion banks.    

Tuesday’s 133,261-contract net short position is the lowest net short positioning for the PM commercial traders since March 30, 2010 when the PMs reported a net short position of 127,640 contracts with gold then at $1,103 and staging for a rally up to the $1,250s the following June.  Just below is a chart showing the PM net positioning in COMEX gold futures. 


Source for all charts CFTC for COT data, Cash Market for gold.  If the images are too small click on them for a larger version. 

Please note that the PM net position is expressed as a negative number, so as the net short position falls the blue line in the graph above rises and vice versa. 

Notice that since October 12 (gold then $1,350.54), the PM commercials have been generally and steadily reducing their collective net short positioning as the price of gold advanced to as high as the $1,430s and had corrected back to the $1,367 level by Tuesday.  Generally speaking, it is unusual for the PM commercial traders to reduce their net short positioning as the price of gold moves higher (as they did from October 12 to December 28), because in theory the higher the gold price the more incentive there is for the commercials to “hedge.”  That makes sense because at higher prices the large sellers of gold futures become more confident of lower gold prices in the future and vice versa.

Continued, much more below...

Since October 12, the PMs including the large U.S. bullion banks have reduced their net short positions and thus their obligations to deliver gold by 57,352 contracts or the equivalent of 5.7 million ounces of gold metal.  As of Tuesday (January 18) the PM commercials, the largest part of the traders we call the “Big Sellers” of gold futures, still held contracts to deliver 13.3 million ounces of “paper gold” at some point in the future on the COMEX, division of the CME Group.

So, as gold continued its negative money flow for the reporting week, the PMs were reducing their net short positioning this week, which is not unusual, but as they were reducing their net short positioning, the more mercenary of the commercial traders on the COMEX, the traders the CFTC classes as Swap Dealers (SDs) just plain hammered the gold futures market.  However, the SDs did not clock gold with a mini avalanche of new short positions.  No and interestingly, the SDs instead collectively sold, offset or closed almost 33,000 of their long positions while they covered or offset about 5,300 of their short positions!  The net effect being a very large increase of 27,580 contracts to their net short position as shown in the SD futures positioning graph just below. 

Edit: It has come to our attention that our dataset for this graph contained an error. Please disregard the chart below and the commentary about the SD "hammering" the gold market. Apologies for the obvious blunder, and thanks to one diligent reader (Kurt) who alerted us to the data glitch. Feb 12, 2011  The correct SD position for Jan 18 was -73,210 contracts.


Remember that gold moved lower Tues/Tues by just $13.27 and as it did the PM commercials were “getting smaller” again, meaning they were reducing their net short positioning.  Meanwhile the SD commercials aggressively dumped nearly 30,000 of their long contracts, adding downward pressure to the gold market.  Obviously their “firepower” to reduce long positioning is limited by the number of long positions they control.  

(See Edit above.)

That is the largest one-week increase in SD net short positioning since July 24, 2007 when the SDs clobbered the gold market with a very similar 28,924 contract increase in net short positioning with gold then $683.20.  Incidentally, and we think something to watch for, the following week (July 31, 2007) the SDs virtually reversed the trade, covering or offsetting a big 26,780 contracts as gold fell $17.60 or 2.6% to $665.60 then.  That gives an idea of why we refer to the SD commercials as the more mercenary of the two classes of commercial traders. Three months later, in early November, gold had punched through $800. 

Thus, we are all witnesses to unusually violent changes in the SD positioning.  As we reported in last week’s full Got Gold Report, one week ago the SDs reported covering or offsetting 17,838 net short contracts as gold was near flat for that reporting week.

Apparently that was merely a head-fake, because this week the SD commercials’ net short positioning jumped from 75,630 contracts to 103,210 contracts net short.  They went from being the least net short they have been in months back to pretty darn strongly net short in the blink of a COMEX eye. 

We have already seen that the last time they did that, in July of 2007, they were only in that heavy sell-down mode for one week.  Since Tuesday, gold has tested as low as the $1,337s, roughly $30 or 2.2% lower. 

Are the SDs already reversing their January 18 gold hammering, or are the mercenary hedgers and short sellers convinced that gold has more downside to “harvest”? 

While the PMs were still “getting smaller” in the gold futures net short business, and the SDs were hammering gold, the largest long-side traders, the traders the CFTC classes as Managed Money (MM) continued to reduce their net long positioning.  This week the MMs reported a reduction of 6,316 contracts to show 133,240 contracts net long.

A long position benefits if prices rise, the opposite of a short position.

That is the lowest MM net long position since May 19, 2009 with gold then $925.70.  Since October 12, when gold closed at $1,350.54, the MM traders have reduced their net long positioning for gold futures by a very large 90,719 contracts or 40.5%.  What is remarkable about that is that the spot price of gold was actually higher on Tuesday than it was three months ago on October 12.  The supposed largest buyers of gold futures have been steadily reducing their net long positioning for three months as gold formed an interim price top.   

When the commercial hedgers and short sellers are viewed as a group, the combined large commercial net short position (LCNS) for gold futures actually fell 18,593 contracts this week, from 225,064 to 206,471 contracts net short.  We have to go all the way back to August 18, 2009 to find a lower LCNS.  The combined commercial traders reported being net short 204,545 contracts back then, with gold at $938.95 and just about to challenge $1,000 in September.  Just below is the graph for the nominal combined commercial net short positioning for COMEX gold futures.


We compare the combined commercial net short positioning with the total open interest, what we call the LCNS:TO or the Relative Commercial Net Short Position and it is the most important graph we track in our COT studies each week.  As gold moved roughly $13  or 1% lower this COT reporting week, with all the wild changes we saw in the Producer/Merchant commercial sellers and the mercenary Swap Dealers clobbering gold, the Relative Commercial Net Short Position falls this reporting week, and it fell quite a bit from 38.3% to a low 35.1%. 


November 25, 2008, during the heat of the 2008 worldwide financial de-leveraging panic was the last time that the LCNS:TO was lower than Tuesday’s 35.1%.  Back then, the Thanksgiving from Hell, gold closed at an extremely volatile $821.58 and the LCNS:TO then showed 33.7%.

It is our contention here at Got Gold Report that as the LCNS:TO falls lower on the chart above it strongly suggests at least two things.  It suggests that the Big Seller’s (of paper gold futures) confidence in lower gold prices is falling and it also suggests that bull-side or buy-side “horsepower” is building.  If we are correct in those assessments the largest, best funded and presumably the best informed large hedgers and short sellers of COMEX gold futures have become the least confident in lower gold prices since the Thanksgiving from Hell in 2008.

Does that mean that gold is set to rise tomorrow or next week?  Not necessarily.  Short term anything is possible and gold hasn’t really corrected all that much yet.  But we think it does mean that a virtual mountain of bullish “firepower” is building for when gold shows traders it has found “overwhelming support.” 

This is the kind of analysis we share with members in our fast-growing Got Gold Report.  To subscribe please click on the GGR Subscribe link above-right and thank you for doing so.  Subscribers help to make GGR possible. Our next full GGR is scheduled for next weekend.  We thought the above information was too interesting to not share it with our readership, rather than waiting for the next full GGR.  For new readers, we are reprinting below a short explanation of what Got Gold Report is. 

For our many new readers, what is GGR?  

At Got Gold Report we are both longer-term precious metals investors and holders and we enjoy short term trading of the metals in this major secular bull market.  We are and have been first of all accumulators of real physical metal. We consider those resources as untouchable for now and for the foreseeable future.  Until we become convinced that world confidence in fiat currencies and the governments that print them is increasing; until we become convinced that more wealth will be exiting gold and silver than entering them, or unless there is some personal emergency or tremendous opportunity, we are not interested in selling or “trading” our accumulated bullion.  We want more, not less precious metals and intend to add to them opportunistically.  

In order to help earn more resources to add to our precious metals we are also traders. Our style of investing/trading may not be for everyone, but it is what we have found to be a fun and profitable way to play. We take short-term trading positions in the metals when they arrive at where we believe strong to very strong support is likely to form.  Then we follow the news and changing events, the CFTC commitments of traders reports, as well as a list of charts and other important (to us) indicators that help us to use our long trading experience to carefully place trading stops along the way as the metals advance. The basic idea is to capture much or most of major move in the metals while allowing our stops to determine when the trade is done.  

When our stops are finally hit (as they were over the past trading week), we exit to the sidelines to once again wait patiently, like good Vultures – for days, weeks or months – waiting for the next high-percentage opportunity to redeploy our short-term trading resources. 

Finally, we also enjoy trading very small Micro-cap and “Nano-cap” junior miners and explorers in a specialized method we call Vulture Bargain Hunting, a method we developed over more than a decade of successful trade.  There is a lot to the method; it is definitely not for everyone, but briefly what we seek to do is “game” the best resource company “gurus” in the business while taking advantage of the enormous volatility inherent in that space.  For example, of six companies chosen as fully fledged Vulture Bargains in 2010, half of them provided us with at least a “double” or more and the opportunity to sell half the position to hold half the position free of “cost” or risk. Two of the others are currently on Free Shares Watch, meaning they have traded very close to a double, close enough to remind Vultures to be at the ready to go Free Shares on them.  One of our six, high-risk-high-reward VB companies had disappointing drill results late year and ended up in our Tax Loss Shopping Cart in December.  We are very pleased with our 2010 VB opportunities and we look forward to 2011 with enthusiasm.  We think 2011 could be every bit as interesting a year for Vultures.    

Thank you for investing your valuable time with us today. 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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