Thursday, May 08, 2014

Gold Trade Nearly Net Long COMEX Gold Futures

HOUSTON – Just as there seems to be too many funds/money managers parked on the short side of bonds (here, see the positioning of the Large Specs in 10-year note futures for yourself, courtesy of SoftwareNorth.  The Large Specs are the light blue colored bars showing a very large net short position along with the non reportables, also net short, for the 10-year). 

20140508 TNote Futures

The traders classed as “commercial,” usually on the other side of the battlefield from the Specs, remain net long bonds despite a low, low interest rate near 2.6%.  With the positioning skewed so much to the short side bonds are having a heck of a time doing anything but the opposite of what those funds have positioned for.  So, as we were saying, just as there seems to be too many bets on the short side of bonds, there also is apparently a similar miss-bet on the downside of gold.

That’s a declarative statement, isn’t it?  Does the CFTC commitment of traders data back it up?  You decide. 

However, rather than it being an obvious oversized play or one-way bet by the speculative hot shots on the COMEX, it just might be something we COMEX watchers only rarely see – evidenced more by the absence of something than the presence of something.  Let me explain… 

And, let’s jump directly to the class of trader we most associate with hedging on the COMEX gold market, the class of traders the CFTC labels “Producers, Merchants, Processors and Users.”  These are the biggest of the big gold traders in the world.  The largest bullion dealers, the refiners, the producers, manufacturers, jewelry makers, bullion management firms, etc., and this category also includes the bullion trading banks that they end up doing their hedging through - out of convenience, or out of necessity.  We have come to call this category the Gold Trade, because it represents a huge slice of the gold market that would naturally have an unprotected long position if they did not hedge using futures or swaps to lay off some of that very real inventory risk.

The simple key to tracking and following the Producer Merchants is gauging their motivation to hedge.  The higher the number of hedges they have in play, we figure the more they fear that the price of gold might move against them in a big way.  More about that in a moment.     

The most recent CFTC data, for April 29, incredibly shows that with gold having sold down to just under $1300 ($1295 to be exact) the Gold Trade reported holding a tiny 16,684 contracts net short.  That’s it!  And that ain’t much for an entire market.  

Indeed, as the graph below shows clearly, the Producer Merchants (PMs) are not all that far below their record setting and very rare record net long position set back on December 3, 2013,  when they reported a collective 12,295 contracts NET LONG, with gold then $1223 the ounce. (Today with gold near $1300 the Gold Trade is no longer net long, but they are sure not very net short either.) 

20140508 PM Gold Net

For comparison, as the graph also clearly shows, back when the gold price was still above $1500, the Producer Merchants kept a much larger number of hedges on – to protect against the gold price falling abruptly.  We can quantify that generally just by looking at the graph which shows that the PMs kept somewhere between say 140,000 and 210,000 contracts net short in COMEX gold hedges. 

Get that?  In case the numbers put somebody to sleep, what I just related was "SOMEWHERE BETWEEN SAY ONE-HUNDRED-FORTY-THOUSAND AND TWO-HUNDRED-TEN-THOUSAND CONTRACTS NET SHORT...

Back last year or the year before, or the year before that, with gold then above $1500 and as high as $1900 the ounce, the Gold Trade felt it was prudent and advisable to keep their natural long positions hedged.  Today, with gold down around $1300, not only has the Gold Trade taken off almost all of their collective hedges, just recently, when gold traded to the $1220s, they sort of “reverse hedged” with a net long position – meaning that the Gold Trade was not worried at all about the price of gold falling any more.  They were positioned more for the price of gold rising! 

The point, if we can be forgiven for hammering it one more time, is that with gold having corrected down to as low as the high $1100s a year ago in June and since then trading more or less sideways, building a base we reckon, the people who ought to know more about the future price of gold than anyone – the Gold Trade itself – are nearly flat gold futures and not far from net long. 

Remember we said that this time it might be the absence of something rather than an abundance of something that we focus on?    Well, here’s the PM graph again. 

20140508 PM Gold Net Cr

Notice the amazing difference between where the blue line, the amount of contracts the PMs hedged their natural long positions in 2012, with gold then between $1500 and $1800 (lower circle or oval, heavily hedged), and where it is today with gold near $1300 or so (upper circle, virtually unhedged). Just a huge, huge difference, and we think very telling. 

Remember that the blue line in this case represents the desire or willingness of the Gold Trade itself to put on “insurance” to protect against a falling gold price.  Simply put, when gold was closer to $1800, the PMs were very highly motivated to put on hedges.  Today, with gold near $1300, not so much.  In fact, they are very close to becoming net long again. 

The bottom line is that the Gold Trade (who ought to know more about what to expect for gold prices than just about anyone), remains unmotivated to hedge their long positioning in gold near $1300, but one class of trader is pushing and talking a blue streak along those lines.  Next time we can contrast the Producer Merchants covered in today’s offering, with traders the CFTC classes as Swap Dealers, the mercenary prop-trading banks.  We think it will become clearer which of the two groups have been attempting to get more downside traction going, albeit unsuccessfully so far, and which of the two groups is the most vulnerable to rapid changes in the price of gold.  (Hint:  The conclusion, a similar event of which played out in 2010, might surprise some, but probably not long time GGR readers...)   

That is all for now.  


Vik"Gold is money.  Paper is not.  That's just the way it is, pard." 


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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