Monday, May 21, 2012

CFTC - Managed Money Short Positioning High for Gold, Silver

  • Could be 100 Octane Rally Fuel for precious metals.

SOUTHEAST TEXAS – Taking a break from the grueling, demanding and intense quest for things with fins and scales for a half day* today, we thought we would share with everyone a couple of the more interesting charts which surfaced in the latest Commodity Futures Trading Commission (CFTC) commitments of traders report (COT).  The report was released Friday, May 18, with data as of Tuesday, May 15. 

According to the CFTC, as of Tuesday of last week, large traders the CFTC classes as Managed Money (“MMs,” hedge funds, commodity trading advisors and other funds that trade futures on behalf of others), increased their short positions in gold futures by 9,837 contracts to show 32,822 contracts short.  That is the highest pure short position for the “funds” since September 16, 2008, during the height of the 2008 panic with gold then in the $770s.  One week later, on September 23, gold closed at $891.90, about $122 higher as the MMs covered or offset more than 20,000 of those short positions (not a misprint).   


Source for all graphs CFTC for COT data, Cash market for gold and silver. 


Very high pure short positions for the usually net long Managed Money traders very often correspond with important turning lows for gold.  To confirm that notion simply look at the graph above and note that the spikes to the upside for the blue line (short positions) often correspond closely with bottoms in the pink price of gold. 

The graph above is in part why we say that large MM short positions are “100-octane rally fuel” for the price of gold.  The typically long side of the battlefield likely uses short positions to temporarily “hedge” existing long positions they do not wish to close.  Their short positions are just like any other shorts, they have to be covered (bought back) at some point prior to expiry.  Higher short positions are “buying pressure in a bottle” more or less. 

Remember that the positioning above was on Tuesday with gold then trading in the $1,540s.  Gold has indeed advanced since then and is currently trading in the $1,590 region as we write on Monday, May 21, 2012. 

That high short position is in part why the Managed Money no-spread net position shows the lowest net long positioning (80,098 contracts) since December 16 of 2008 (73,332 contracts net long then with $858 gold).  On Tuesday Managed Money traders were the least net long gold futures since the global panic of 2008 in other words.  


So, to conclude this brief look at the Managed Money gold futures positioning, it’s pretty clear that “the funds” decided to “hedge” their long trades by adding shorts up to last Tuesday.  With gold moving back to the upside, we can expect with little doubt, that the MM’s pure short positioning will be considerably lower and their net long positioning will therefore be higher in the next COT report.  The only question is by how much.  That is, of course, unless gold does something weird by the close tomorrow, Tuesday, the cutoff for the next COT report.

Similar Story for Silver

Turning to an interesting graph for silver futures, take a close look at the graph below and, given what we just shared about gold futures, answer the question:  What does this high pure short positioning by the usually net long “funds” mean?  


Well, what it usually means is that silver is getting close to a bottom if history is any guide.  To quantify the chart above, Managed Money reported an increase of about 3,700 new contracts short over the past two reporting weeks, to show a relatively high 12,518 lots short, with 3,334 contracts of that increase coming in the May 8 reporting week with silver then closing at $29.43. 

That is actually the highest pure short positioning for the “funds” since the September 16, 2008 report (arrow), when they showed 13,171 short contracts with silver then at $10.48.  One week later, on September 23 silver closed at $13.26, but the funds only covered 1,538 of those short contracts.  That was an ill omen that the funds did not cover more of that short position then and indeed silver was not yet done with its waterfall panic, rush to liquidity plunge. By late October silver was back under $10 and did not forge a sure-enough bottom until the beginning of December, 2008. Interestingly, by the time silver did indeed make its seminal turning low in December, the MMs had pared their pure short positions down to just 5,384 lots on December 9. ) 

The high short position for Managed Money traders is in part the reason that their collective net long futures positioning was so low in this May 15 report.  As shown in the chart below traders the CFTC classes as Managed Money reported holding a combined net long position of just 5,703 lots – not very much higher than the 4,752 contacts net long they reported at the end of 2011 in the December 27 COT report with silver then at $28.67.


As should be clear from the chart above, when the combined net long position for Managed Money traders (blue line) reaches the lower limits of the chart it often corresponds with lows in the price of silver. 

Sure enough, since Tuesday silver briefly tested a $26 handle before catching a bit of a bounce.  Silver is currently trading in the $28.30s as we write (a little above the May 15 cutoff of $27.69) and it will be extremely interesting to see if the “funds” have seen fit to begin covering some of those “temporary hedges,” and if so, how many of them.


Silver is testing “The Green” or the area we have been looking for support to show.  We strongly suspect the MMs are covering some of their shorts, opportunistically, but we, like everyone else, will have to wait until the Friday release of the COT for confirmation of that notion. 

Meanwhile, in a contrary sense, the COT data suggests that gold and silver are very close to a bottom, if one has not already been put in last week.  In part because of the data shown above, yes, but also because of the positioning of the usual Big Hedgers, but that story will have to wait for another time.  We have run out of “break time” and have to get back to our grueling, demanding and intense quest for things with fins and scales…

As we send this off to be posted we note that the AMEX Gold Bugs Index or HUI is up about 2.5% to the 405 level, and there has been little in the way of meaningful retreat for the precious metals on an up day for the Big Markets.

That just might be some continued short covering underway – into dips.  If so, it ought to be visible in the next COT report and would be an unmistakable signal to traders and speculators who follow the COT data consistently.   

Hold down the fort, help is on the way… 

*We are between fishing events, but on relatively “low power” personally.


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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