Tuesday, March 12, 2013

Gold Breakout Attempt with Higher Volume

HOUSTON -- Speaking of dead cats bouncing or possibly important short covering rallies marking a major reversal:  Below is a visual of this morning's breakout attempt for gold in 5-minute increments.  Note the much higher volume that kicked it off just after 07:00 EDT.  (Screen shots just after lunch.)  

20130312 Gold Breakout

For comparison, below is the same chart in hourly terms.  (More...)

20130312 Gold Breakout Hourly

And to put both of the above charts in context, this one below is daily.

20130312 Gold Breakout Daily

The speculative short position in COMEX futures held by traders the CFTC classes as Managed Money is about 60% higher than it was last year in May, when gold found support near $1,526. 

The "Funds" held nearly 70,000 gross short contracts as of Tuesday, March 5 with gold then about $1,573.  The highest gross short position they held last year as gold tested the $1,520s in May was a little under 41,000 contracts, so if the managed money traders become convinced this pullback for gold is done, they have a lot of "insurance shorts" to cover this time.   

Interestingly, the Funds held onto a large number of their long gold futures contracts while building up their "insurance shorts" this time.  As of March 5, Managed Money traders held about 108,000 contracts long gold futures. 

If locals and smaller traders believe the Funds have moved to cover their insurance shorts, they are likely to attempt to front run the Specs, upping the gold price in the process. 

The chart below shows the Managed Money short position visually as of March 5.  It has never been higher since the CFTC began reporting this category of traders. 

20130312 Managed Money Gross Shorts
Source for COT CFTC, Cash Market for gold, Got Gold Report.

Spec shorts are high octane rally fuel.  In the recent past, since at least 2006, very high short positions for Managed Money traders have corresponded with important lows in the price of gold.   The most obvious examples are apparent in the chart above in 2008 and again in 2012. 

Perhaps a "tell" in poker parlance, the Funds put on that record high gold short position while hanging onto the bulk of their long contracts, so we view the speculator shorts as a kind of "technical breakdown insurance." (Like delta hedging those long positions.)

Doubly interesting, the very high gross short position by the Funds comes at a time when the usual hedgers in gold futures, Producers, Merchants, Processors, Users and the bullion banks many of them trade through, reported their lowest net hedges since the 2008 panic, as the chart below shows clearly. 

20130312 Producer Merchant Net Gold

Since the Producer/Merchant net position is a negative number, the higher the blue line in the graph above the lower the collective net short position.  The natural hedgers have not had so few net hedges since December of 2008 with gold in the $850s.   

The way to think about it is that the trend following Funds built up a very high short position as gold corrected back to below $1,600, but it was while the natural hedgers have become the least fearful that gold prices would fall since the great panic of 2008.  So we have the trend following funds selling but the hedgers thinking that gold has little or no downside left to go. 

Isn't that an interesting setup? 

It is also very highly imbalanced and could spark some wild volatility just ahead, so buckle up!   

There is a great deal more to it than just the above and we looked into it much more in-depth in a recent report shared here at Got Gold Report, but today is the first clear sign that the record gross short position held by the Funds might be turning into what we referred to as "high octane rally fuel" for gold futures. 

Of course the futures are not going to break out and move anywhere unless gold is "ready" to do so in the much larger and more important physical, forwards and OTC markets overseas, but that is a different story for another time. 

For now it looks like a breakout is definitely trying to get underway.  The battle for $1,600 is joined.  At about $1,627 or $1,630 is where it might get to the explosive, high volatile stage.  That's where there ought to be a good deal of trading stops to trigger, both buy stops and short trailers.  Until then both sides will likely continue to be cautious, but convinced they are on the "right" side of the contest. 

Meanwhile, contrary to the last attempted breakout, mining shares big and small seem to be answering this rally attempt.  As we close this update the Amex Gold Bugs Index (HUI) is green by more than 2%, the GDXJ up about 2.5% and the GLDX is surging, up 3.3%.

That is all, carry on.   



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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