Monday, December 09, 2013

U.S. Bullion Banks Positioned for Higher Gold Prices

Edit 1:  Adds the chart of Non-Reportable gross shorts, by request and a trade opinion/comment.

HOUSTON -- As we reported on Friday, the CFTC Bank Participation Report (BPR) showed the four reporting U.S. bullion-trading banks holding 71,897 COMEX gold futures contracts long and 14,489 short, for a net position as of December 3 of 57,408 contracts net long.  Below is a graph which tracks the U.S. bank positioning and gold.

20131209 BPR Gold

As mentioned in the chart, U.S. bullion trading banks became net long gold futures with the June 4 BPR, with gold then near $1400 the ounce.

For a sense of how unusual it is to have the bullion banks net long gold futures, check the graph at the bottom of our Friday offering here.    

Clearly, with gold in a $1200 to $1400 trading range, the U.S. bullion banks’ customers have positioned to benefit from higher gold prices more than not. 

What is interesting about that is that, because of the nature of their business being dominated by hedging, the U.S. bullion banks are typically on the net short side of the gold futures battlefield. 

There are any number of ways of looking at this important change in positioning, but one of them is that, just recently, as the momentum following hedge funds have ramped up their gross shorts on gold to record high levels (pressing gold lower), the bullion banks (and the category of traders the CFTC calls Producer Merchants, of which the bullion banks are a part, we believe) have “answered” in a way, with the usually net short bullion banks now net long and the normally hugely-net short Producer Merchants also net long gold futures. 

Intuitively the setup suggests to us that the largest traders of gold futures – the people in the gold trade itself and the bullion banks they often trade through – are no longer positioned to benefit from lower gold prices.  To the contrary.

Or maybe the gold trade and the bullion banks just see an enormous amount of speculative short bets on gold? 

20131206 Gold MM Short

(Chart shows the record-high gross short position currently held by Managed Money traders. As of December 3, 83,730 short contracts, the highest in DCOT history, with data since 2006.  Not shown, smaller traders the CFTC classes as Non-Reportable held another 38,099 short contracts.  Non-Reportable traders were actually slightly net short as of December 3.) 

As our readers already know, speculative shorts for gold futures are the highest of high octane rally fuel for gold – under the “right” conditions. Spec shorts for gold are as naked as they can be and thus must be bought back at some point.  In that respect spec shorts are "bottled buying power" waiting to be un-corked.

One wonders where, exactly, the pertinent technical levels are to trigger the coming fireworks and what the catalysts for it will be.  Alas, both will be only be confirmed in retrospect, but that doesn't mean we can't be on the lookout for it...   

It will be interesting to see how it fleshes out in the days and weeks ahead. 

That is all.  Carry on. 

Edit 1:  Adds the chart of Non-Reportable gross shorts, by request. 

20131209 NR Short Gold

(Smaller Non-Reportable gross shorts, 38,099 contracts as of December 3.  As shown below, the Non-Reportables are actually slightly net short as of December 3.)

20131209 NR Net Gold

 (Non-Reportable net position = 392 contracts net short Dec 3.)

Trade comment:  There are a large number of spec traders on the same (short) side of the boat. Look for gold bears to ramp up the rhetoric, especially in the event that gold edges higher to test the key $1256 region just ahead.  Somewhere between there and the low $1280s is a likely gang-up of buy and short trailing stops that the gold bears will hope not to have to defend.  

At least that's where I expect they may have bunched up as of now.  

Above about $1307 at this stage would be modestly shocking to the overly confident short sellers and would almost certainly trigger much more aggressive short covering and even larger buy stops.  Watch for it, although I am at a loss as to what the catalyst might be to trigger it so far.  That does not mean there is not a trigger, just that I cannot identify one this minute.  GA  




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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