Monday, February 25, 2013

Market Tremors Continue as Funds Flow back into Gold

HOUSTON -- Seismic tremors can signal a volcano is getting close to an eruption.  Scientists monitor them to try to predict when a slumbering giant volcano might come back to life.  By doing so they might be able to warn the population ahead of a 'major change event' like this. 

  20130225 Volcano

The capital markets sometimes register tremors of a different kind - ahead of a different kind of important change event.   

Below are five minute period snapshots of the trading today, Monday.   A day when the VXO volatility index snapped higher in a very big way (from a 12 to a 19 handle), signaling at the very least a short term end to the complacency that dominated the early part of February.  As we looked at these graphs we could not help but think of a seismograph and what the squiggles registered by that instrument mean to geos. 

20130225 markets 1
(Very short term 5-minute period, 1-day charts courtesy of Finviz.com.  They show knee jerk reactions out of stocks and into bonds, the U.S. dollar and the Japanese yen. )

Whether it was naked women protesting Silvio Burlesconi, Elections in Italy, the Fed Humphrey Hawkins  testimony tomorrow,  Sequestration or horse meat in Ikea meatballs, traders seem to be in a shoot-first and ask questions later mood in late day U.S. trading.   

Whatever the actual reason, market tremors seem to be getting stronger in magnitude, amplitude and frequency.

Perhaps we are about to reverse the positive money flow to the Big Markets and the negative money flow for gold, silver and mining shares? 

Gold managed to show a modest rally today, with mining shares more or less answering.  London  Gold tracking SPDR Gold Shares (GLD) gained about 1.4% and the AMEX Gold Bugs Index (HUI) added about the same percentage. 

20130225 GLD VC
(Short term one-hour volume candle chart showing a possible selling climax for GLD last week and modest, tentative bounce on relatively low volume late Friday and Monday.)  

Negative money flow and poor bullish sentiment for gold may have reached a negative crescendo or selling climax late last week.     

Reports (including ours) detailing an unusual condition in the positioning of the largest traders of gold and silver futures suggest hedge fund gold bets the metal would fall had reached "record levels."  At the same time the positioning of traders classed as Producer Merchants, including bullion banks and large metals refiners and dealers, reported their lowest net hedges since November of 2008.  See coverage at GATA here:   http://www.gata.org/node/12275 

As we reported to Got Gold Report Subscribers over the weekend, the CFTC commitments of traders reports for large reporting traders has become the most imbalanced it has been since 2008 - in a contrary bullish way.   Below were our bullet points to begin the report.

• Disaggregated CFTC Commitments of Traders Report (DCOT) for February 22 Shows Managed Money (The Funds) with Enormous Record High Gold Short Position.
• Producer Merchants Including Bullion Banks Report Lowest Net Hedges Since December 2008 During the Panic.
• And that was with gold at $1,604 and silver at $29.45 one day before the Wednesday smack-down…
• Gold COT very strongly bullish in a contrary sense, but dangerous for both sides of the contest.    

The full report is available to GGR subscribers, but what does it mean? 

It might mean an old fashioned short covering rally has become more likely.  If so, the Funds have never had so many short contracts they have to buy back.  The chart just below shows just the short positions of traders classed as Managed Money, aka The Funds, as of Tuesday, February 19 with gold then $1,604.  

 

20130222 MM gross shorts

Managed Money reported holding 66,697 short gold contracts, more than doubling their shorts in a month.  There were 56 members of the Managed Money class reporting shorts, so that equates to 1,191 short contracts each if evenly distributed.   Gold tested as low as the $1,550s Thursday, so the Funds likely had even more shorts on their trade books by then, so even more gold contracts they need to buy back.  We called it "stunning," wondering aloud if the funds knew their collective gold shorts had grown to so large a position.   

With market tremors escalating and the spike higher today in volatility indexes, a 'major change event' just might be developing - as in a violent major trend reversal 'earthquake' across multiple markets.  

If so, the recent months-long outflow of liquidity for gold could reverse back to an inflow again, like it did in January and August of 2012,  or February of 2011.  With nimble 'locals' and smaller futures traders hoping to front-run the much larger, perhaps overly short Managed Money traders as they begin reducing that huge, largest ever recorded short gold exposure. 

20130225 Gold

It could be an earth moving event this time, perhaps registering pretty high on the 'market Richter scale.'  (Or moment magnitude scale if you prefer.)     

Gene Arensberg for Got Gold Report

 

 


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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..."

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


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