Monday, February 18, 2013

Gold COT Imbalanced, Becoming Bullish

Changes in gold futures positioning of the largest reporting traders very interesting and have now become contrary bullish.

SOUTHEAST TEXAS – Changes in the positioning of very large traders of paper gold futures in the most recent Commodity Futures Trading Commission (CFTC) commitments of traders (COT) report (February 15 for data as of the 12th) are important and very unusual.

As Got Gold Report Subscribers (Vultures) already know, because of our commentary directly in the linked technical charts, the aggressive sell down this past week (Gold -$57 to $1,609 and Silver -$1.59 to $29.76) was not, repeat not, fueled by aggressive selling by the Big Hedgers or bullion banks (contrary to repetitive uninformed or misinformed bloggers who, embarrassingly, try to fit everything into a single bank-hating theory).

Instead, with gold-buying China out of the market this past week for their New Year holiday, Japan out part of the week, an earthquake of sorts caused by long-only pension funds announcing an exit from commodities (well after the fact for many of them we might add), media focus on two or three high profile actors who sold positions in SPDR Gold Shares (GLD) (Soros, Bacon, et al, back in Q4 of 2012, but only announced in Form 13 filings this week) ... and with The Big Markets still showing surprising strength, the selling pressure on gold comes not from the bullion banks or the hedgers they trade for, but from Managed Money – the trend following Funds and the investors they trade for.

As the data will show in just a moment, we have reached a point where the positioning of the largest traders of gold futures is very imbalanced. The setup is practically begging for a massive, very violent reaction just ahead.

We only very rarely see this kind of imbalance, but when we do it can get pretty dangerous for traders on both sides of the battlefield for a very short period of time. Huge elephants, capable of buying/selling and influencing hundreds or even thousands of contracts in minutes, are battling it out now in the futures – and in the OTC physical and forwards - and we mice need shelter until the battle has declared a new victor. Having been profitably stopped out of gold futures last month, we watch the battle underway from the safety of a “sideline cave!”

To understand what is going on we first have to see where the traders were positioned as of the close on Tuesday, Feb 12. (Gold closed $1,651.07 already down $21.66 or 1.3% from the prior COT week. Silver $31.09, down $0.70 or 2.2%.) So the sell-down was already well on its way and the bears had the ball then. Recall that was the second day of China being mostly out of the physical gold market. Never forget that futures answer the physical market, not the opposite.

As the data will show, what we have is one of the rare instances when the usually long Funds (Managed Money) have taken an unusually large (actually record large) short position even while maintaining significant long positions. As the data will also show clearly the usually short Producer Merchants, the natural hedgers and the bullion banks they trade through, have not increased their hedging and instead have seen fit to have a very low level of hedging with gold having fallen to the $1,650s. We suspect that the very smart hedgers are even less hedged now with gold having blown through stops to test $1,600.

The growing selling pressure finally broke through the level where a large number of stops had accumulated on Friday, giving the Funds an unusual short term victory – on the short side.

20130218-Gold Graph 1

The normally mostly long Funds have engineered a short term play normally attributed to the guys on the other side of the battlefield. Namely, they just pulled a short raid on gold. The Big Irony is that despite the obvious and clear data to the contrary, one particular camp out there will continue to blame the bullion banks for this sell down.

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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..."

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