Please click on the following link to listen in to my regular weekly interview with Eric King on the KWN Weekly Metals Wrap.
I want to make a brief clarification of a comment I made in regards to "limits" on the Commitment of Traders report that might be misconstrued. When I said that there are no limits in regards to "how many specs can come into a market", I did not mean to imply that there are NO POSITION LIMITS in the precious metals. There are of course position limits that apply to speculators. What I want to emphasize is that there are indeed no limits as to how many specs can decide to come into the gold market. The exchanges in conjunction with the CFTC do not publish a rule stating something to the effect, "Oh, we see that there are now 75,000 different speculative accounts on the long side in gold. That's it - shut the barn door and don't let anyone else in".
This is the reason that we cannot look at a build in open interest and dogmatically state that the market will now top out because the speculative net long position has reached such and such levels. All bull markets are marked by INCREASING open interest and along with that, an increase in the number of specs on the long side of that market. The reason is very simple - it takes financial firepower to drive a market higher and that requires a steady steam of buying. Absent this buying, the force of gravity takes over and markets fall lower.
Another way of saying this is that in order to keep markets levitated, thrust or force must be continuously applied. Absent this force, the path of least resistance is downward as gravity takes over. Speculative buying is the force that therefore drives a market higher. The higher a market runs then, the more speculative buying that accompanies that move higher. A bull market that makes new all time highs, should see the size of the speculative long category making new all time highs as well. This is normal and healthy. Whenever you see a market moving higher and the speculative long side exposure DECREASING, beware; the move higher is being driven not by new buying but by trapped shorts who are BUYING back existing short positions or short covering. Once they are done getting out, the market will then collapse because there are no NEW SPECULATIVE BUYERS around to keep applying upward force against gravity.
The thing we do watch with the COT report however is the size of large spec long side levels, AND whether or not the market continues to move higher or whether it stalls out and then drops through a technically significant support level on the price charts. If that occurs, the nature of the markets is that the computer algorithms will generate sell orders among the spec long holders. That is what the bears are always counting on - a rash of sell orders coming from sell stops located below the market which then feed a frenzy of additional selling as the computers take over. The larger the build in the speculative long side exposure, the more POTENTIAL there can be for a sharp move lower as their long positions are flushed out.
Incidentally, the Asians love these spec flushes as they pounce on the markets at lower levels to accumulate more at a better price.
The key for the gold market is whether or not it can continue to attract fresh buying from both existing long holders are who below the position limit threshold and from those who are just coming into the gold market having no previous long positions. As long as you get fresh money inflows, the market can move higher, regardless of the current size of the speculative net long position.
