Tuesday, July 16, 2013

Why heavy gold shorting could lead to a rally

Saefong Myra P

Edit 1, adds GGR comment at bottom. 

For MarketWatch, Myra P. Saefong writes:  Data last Friday from the U.S. Commodity Futures Trading Commission showed that large speculators, which include hedge funds, recently raised their short bets on gold to a record level, analysts said. That’s a bearish signal for prices, but may have also set the foundation for a rally.

When investors take a short position, they’re essentially betting that prices are going to go down. “This is quite clearly bearish,” said Fawad Razaqzada, technical analyst at GFT Markets, but “contrarians would argue that a small adverse move against the trend could see speculators rush for the exits and thus cause prices to rally sharply.”

Traders Yellow Shirts SignalingThe CFTC’s Commitments of Traders report, which offers data covering positions as of the close on Tuesday, showed that large speculators increased their gross shorts to show the highest number of short bets since the disaggregated COT dataset began in 2006, according to Gene Arensberg, editor of the Got Gold Report.

Managed money traders added 2,000 gross shorts to 80,147 short positions as of July 9, according to the disaggregated COT report on futures and options.

With so many shorts on gold to cover, “they better hope they are right,” said Arensberg. “Otherwise, if a short squeeze gets underway for whatever reason, the door to exit those shorts will seem awfully small.”

Futures prices on Tuesday climbed for a second straight day, adding $6.90, or 0.5%, to settle at $1,290.40 an ounce on the Comex division of the New York Mercantile Exchange.

– Myra Saefong

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Follow Myra @MktwSaefong

Original source:  MarketWatch 


Edit 1.  GGR Comment:  Below are comments we thought worthy of consideration: 

In the last (July 12) commitments of traders (COT) report for data as of Tuesday, July 9, with gold at $1251 large speculators (Managed Money) actually increased their net long positioning by 2,498 contracts for the first time in four weeks, albeit from an extremely low level.  (From just 21,384 to 23,882 contracts net long).  However, at the same time they also increased their gross shorts by 433 lots to show the highest number of short bets since the disaggregated COT dataset beings in 2006. 

Looking at the Legacy COT data, the commercial hedgers currently have the smallest number of net hedges (bets that gold will fall further) for gold futures since December 28, 2001, when gold changed hands then in the $276 range.  I suppose you could say that the largest members of the gold trade, who use futures to protect themselves against a falling gold price, are about as worried that gold will fall further as they were with $270s gold.

What I think is interesting this week is that you have three classes of traders with exceptionally high short positions.  The CFTC calls them Managed Money, Other Reportables and Non Reportables.  Together the three classes of traders had a stunning 178,875 COMEX contracts sold short. We have never seen anything like that before.  It comes at a time when the commercials have their smallest number of hedges on in 12 years and gold inventory in the COMEX warehouses is at very low levels.    

Think about it. These momentum-following gamers have sold 17.9 million ounces worth of gold futures into the market that they absolutely know they have to buy back. With that many shorts to cover, they better hope they are right. Otherwise, if a short squeeze gets underway for whatever reason, the door to exit those shorts will seem awfully small.  The first ones out will be fine, but after that no guarantees!   

It is rare to take almost 40% out of the gold price and it can only happen when there has been an unusually large migration of capital out of it.

I think the main question is whether just about all of the people who bought gold, via leveraged bets in ETFs or what have you, but really did not know why they bought gold, have been scared out of it by now.  Those who have experienced a loss of confidence in governments and currencies in the past – those to do have a point of view on gold in other words, are more likely buyers of gold at 40% off than sellers. 

20130717 Gold Weekly

(Images, commentary and graph added). 


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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.

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