Thursday, July 11, 2013

The Stuff of a Gold Bear Reversal?

Markets reacted sharply Wednesday when Fed Chairman Ben S. Bernanke gave a speech after the closing bell in New York, following the release of the FOMC minutes.  Like a coiled spring snapping, U.S. bonds were bid higher by 100 basis points, the U.S. dollar plunged off a non-tapering cliff more than 100 basis points, both the euro and yen caught a hot bid and both gold and silver snapped higher, ostensibly on short covering.  Below is a montage in hourly terms of the movement.

20130711 Montage
(Charts and data courtesy of Finviz.com)

While we are reporting, what are some of the other factors we have been keeping an eye on while the precious metals have been doing the falling-knife-morphing-to-bottom-finding polka?  

Well, we can point to the current structure of the COMEX legacy commitments of traders reports (COT), which currently shows the commercial traders, the natural hedgers, with their smallest net short position in a very long time.  In fact the commercials as a group have not held so few COMEX futures contracts net short since December 28, 2001.  At the same time the Spec Funds and smaller traders, the Non-Commercials, currently hold a similarly low net long position as shown in the graph and recap below courtesy of SoftwareNorth.

20130711 COT Legacy Image

Drilling down into that report, and focusing just on the traders classed as commercial, below is our own graph of the net short positioning of the combined commercial hedgers.  At just 22,776 contracts net short, the professional commercial traders have contracts equivalent to just 2.3 million ounces of gold net short.  That’s a mere $2.9 billion worth of gold hedged net.  For comparison back in October the commercials held net short contracts equal to about 27 million ounces or $47 billion worth of gold hedged then, with gold in the $1770s.  Remember the last time the commercials held so few contracts betting on a lower gold price was 3 months after the 9-11 terrorist attacks in 2001. Back when gold was in the $270s. 

20130711 Commercials Net Short Gold
(CFTC for COT, Cash market for gold, GGR)

Hedgers are positioned for higher gold if history is any guide.

What else have we been watching?  Well, just recently there has been a goodly amount of talk about backwardation in the gold market, and of tightness in the physical market for commercial sized bars of gold as evidenced by rising lease rates and by the London Bullion Market Association (LBMA) GOFO rates going negative to confirm that backwardation. 

20130711 Gold Lease Rates 1 yr
(Gold "lease rates" moving sharply higher. Chart courtesy of Nick Laird's Sharelynx via Kitco.)

Finally, as we have been reporting to our members, this past Bank Participation Report for COMEX gold futures showed that the largest four bullion-trading U.S. banks have built up a combined net long position of 44,717 contracts.  As the chart below shows, the last time the U.S. bullion trading banks were net long was back in 2008.  (The graph tracks the banks net short positioning, so a negative figure is actually a net long position.)

20130711 US Banks Net Gold
(CFTC, Cash Market, GGR)

It is rare to see the natural hedgers on the net long side of gold metal, but there you go.  And it comes at a time of backwardation in London, tight supplies of gold metal implied and now reported, extremely low net short positioning for the combined commercial traders and only after gold has become epically oversold in a nearly two year bear market.   

That is just some of what has our attention just recently.  Let's call it the highlights for tonight.  We could bring in other things to consider, such as Fibonacci retrace levels, or heavy physical offtake reports and rumors, low gold inventory at the COMEX,  among a slew of other signs and signals,  but this is enough for one offering.

At any rate, it has seemed to us that the gold bear market was mature, strongly oversold and probably looking for some kind of catalyst to trigger a change in the momentum and direction.

Perhaps, just perhaps, Dr. Bernanke provided that catalyst on Wednesday with these comments.  

Is this the stuff of a major bear market reversal? 

It could be.  If so, there is a mountain of Spec shorts on right now.  In fact the traders the CFTC classes as Managed Money had their highest ever number of bets that gold would fall in price as of this most recent (July 2) COT report, as shown in the graph just below.  (More than 81,000 gross shorts, the most since the disaggregated COT reports have been published beginning in 2006.)

20130711 MMs Shorts only

That’s a lot of high-octane rally fuel if the gold futures market decides the gold bear market is over and done. 

If a sure enough short covering rally were to get underway in earnest, then the short covering exit door might seem awfully small to try to get through. First ones through the door will make it just fine, but no guarantees after that. 

And if it is not yet the sure-enough catalyst, then it is one heck of a warning shot to those still bearish of gold ... considering the contrary bullish structure of the gold futures market at the moment. (By contrary bullish we mean with the Specs and smaller traders holding record high shorts and the hedgers holding so few hedges.  That usually only happens after a major selloff and bear market, near important long-term turning points for the price of gold.)

Gene Arensberg for Got Gold Report

(The above prepared while traveling, so kindly pardon any minor typos this one time!)


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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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