This is the reason gold cannot find much in the way of traction to the upside and cannot mount any sustained moves higher. Quite simply, big specs are using rallies into resistance to unload stale longs and put on new shorts. Now that near term momentum has shifted to the downside, they are also selling into weakness and pressuring the metal even lower.
Notice that since October of last year, hedge funds have been steadily liquidating long positions in the gold market while simultaneously instituting brand new short positions. The result of money flows out of the gold market that began in that month, in addition to fresh shorting, has sent the gold price down $116/ounce as of Tuesday of this week, when the data for the COT is captured by the CFTC. Gold has since fallen another $39 as of Friday so one can assume that further long liquidation has been taking place by hedge funds along with another fresh burst of short selling by this same group of traders. Another way of saying this is that gold has fallen $155/ounce since this movement or repositioning by large hedge funds has occured in earnest.
I should also note that this is the LARGEST outright short position by hedge funds in Five Years.... that is quite remarkable to say the least.
Dan, most folks reckon that this is a prelude to a very large movement up through those resistance levels, perhaps in 2-3 months time.
ReplyDeleteWhen the money flow reverses and the shorts turn into longs, seems to me to be an inevitable.
Anyway, does look like Silver could see mid to low 20s as resistance to this downturn seems non-exsistent (money flow)
Wait and see, the Feds sweetener to the big money does feel like its going to be a short lived one
Dear Dan,
ReplyDeleteThanks for this interesting point.
I don't know if you can, but it would be great if you could super-impose the gold prices chart to this Hedge Funds Outright Position in gold.
I have like a feeling that they are never as highly short as when the gold prices are bottoming...a chart may confirm (or not) this intuition.
"Now Abram was very rich in livestock, in silver, and in gold."
ReplyDeleteGenesis 13:2
Our time is coming by following Jim Sinclair advice:
"I can only suggest to you as strongly as possible that you need to defend yourself by doing absolutely nothing."
and confirmed by Richard Russell on King World News Radio:
"My advice is to hold all gold positions and wait patiently for the correction to end. Just before the huge 1979-80 surge, we saw a big ‘clean out’ correction in gold. I believe history is about repeat."
Dear Dan
ReplyDeleteWhat is your take on the Chinese New Year? The Chinese markets have been out of the play for the past week, and it seems that some people are taking advantage of this.
Don't you think things will reverse on Monday, when the US is closed and Chinese is back in the play?
Regards
Gustav
Hi Dan, The author of this article writes about backwardation developing in the April gold contract. Does this carry any special significance for you as a trader (assuming the author is correct)? http://www.financialsense.com/contributors/keith-weiner/gold-leaps-into-backwardation TIA
ReplyDeleteDan: For some of us gold bugs, who are retired, the recent losses on PMs and miners are only important to the extent that they are permanent. Assuming we stay invested, with 15% losses today, what would you predict are the odds we will we made whole in the next 5-8 years? I am assuming it is a lock but I could use some back stiffening. I have about 20% of my net worth in PMs and 10% in TGLDX. Thanks, Dan.
ReplyDeleteVery interesting chart, as always Dan. I have a significant portion of my wealth in Gold and miners...I'm sitting on the sidelines now playing with my dogs.
ReplyDeleteWhat strikes me on your chart is that in 2008, Gold bottomed when longs bottomed (11/08) / were exhausted not when shorts peaked (9/08--closer to Lehman crisis). This to your point that speculative interest drives the market.
Hi Dan,
ReplyDeleteIt also looks like the ratio of long to shorts is now about 2.5, looks like at the 2008 bottom it was closer to 2.1.... (again eyeballing from your graph). It would seem that we're going to see some more destruction in the next few weeks. wait until the knife has stopped in someone else's kidney before picking it up.
I would be interested in knowing how much actual bullion was being moved around. I rather suspect that being hedge funds this is all just paper manipulation to drive the price down for a future grab at lower prices. Central banks around the world have been stuffing their vaults with the stuff for sometime now. I suspect that they are more involved in this downturn then realized. The reasons for governments to hoard gold in this economy are not going away. Trust me, this is only a harbinger of more hoarding at lower prices against much worse economic times down the road. Gold always goes lower than expected. Be patient take a position on any successful test of a Fibonacci bottom and put in close stops.
ReplyDeleteI expect gold to at least test the 1500 area. If it closes below that support area on heavy volume then anywhere from 1000-1300 is game. Watch the dollar for clues. As long as the dollar is trusted by foreign entities and, in the face of declining currencies they will want to hoard dollars over gold. As long as dollars are easier to convert to usable assets dollars will be preferred. Watch the bond markets for clues to the dollar. The dollar broke above it's four month downtrend line but did not close above it on the weekly. Watch for a dollar close this month above that line. If it does, chances are gold is going much much lower. May get a bounce this week though.