Sunday, August 14, 2011

COMEX Swap Dealers Cover Gold Shorts like a Big Dog

Largest one-week short covering by the veteran traders in our records.

HOUSTON – The CFTC commitments of traders (COT) report for this week shows significant  COMEX commercial short covering in both gold and silver futures.  Part of that short covering includes the largest short-cover by traders the CFTC classes as Swap Dealers in our records for gold futures.  

First a bit of errata. As we ‘fled the scene’ Friday in a rush to get to the ranch and to our beloved fishing lake, you know, anywhere but in front of the computer screens, we ended up not checking the comparative data in our closing table posted late Friday evening.  What could be simpler than gathering data points and putting them in a spreadsheet that generates our table, we might rightly ask…  Ahem!   

While we wish we could blame several data errors in that table on a now former intern for GGR, that’s just not how we roll here.  The errata (now corrected in the previous web log post) is and was our collective blunder – for which we apologize. 

The corrected closing table is reprinted below for reference. 


If any of the images are too small click on them for a larger version.


Moving on as quickly as possible, notice the unusual action in the graph just below. 

Sources: CFTC, Cash Market

The graph is of the gold futures positioning for the large commercial traders as of Tuesday, August 9.  Why is it unusual?  Because as the price of gold was rising sharply (up $81 or 4.9% Tues/Tues) the largest, best funded and presumably the best informed traders of futures on the planet – the traders the CFTC classes as ‘commercial’ – were in the process of reducing their collective net short positioning, that’s why.   Gold higher, Big Shorts less net short.

As gold rose nearly 5% to the $1,740s the commercials got the heck out of 38,428 contracts or 13.4% of their net short bets.  One way to describe it is that the Big Sellers of gold futures were in full retreat as of the Tuesday cutoff.

The largest portion of the net short covering this week belongs to the traders the CFTC classes as Swap Dealers.  Note the chart just below for reference.

Sources: CFTC, Cash Market

The Swap Dealer traders decreased their collective net short gold positioning by 28,331 lots or 30.9% in one week.  That’s the largest one-week reduction in net short positioning for the mercenary Swap Dealers in our records. They did that by adding 5,469 contracts long and covering 22,862 short contracts, by the way.

(For reference the second largest get-out by the Swap Dealers was in the July 31, 2007 report when they covered or offset a whopping 26,970 lots in a single week then with gold in the $650s.)

CME to the Rescue?

It should not come as any surprise then that just two days after that we learn of a 22% margin increase by the CME.* The exchange does what it can to assist its hedgers in our view, but it couches margin increases in terms of ‘answering higher volatility,’ which is, of course, half true ...  as if people can’t make the connection that they seem to only answer 'high volatility' when it is to the upside. 

When the exchange weighs in with margin increases it’s like the college dean showing up at a wild frat party.  A rather chilling effect, but more likely than not, temporary.

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

*(Effective August 11, the initial Spec bond requirement for 100-ounce gold futures increased from $6,075  to $7,425 and margin maintenance requirements jumped from $4,500 to $5,500.  There were about 521,000 contracts open at the time of the increase.)



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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