"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Friday, February 22, 2013

Speculators Exit from Gold Market Continues

This week's Commitment of Traders report indicates a continuation of the trend that has been in place for some time now when it comes to gold, namely, the mass exodus of speculators from the gold market. Not only that, more and more hedge funds are playing gold from the short side of the market expecting lower prices in the future.

The following chart pretty much says it all. Take a look at the sharp drop in the number of outright long positions hedge funds are holding. Do you see the plummeting line. Is it any wonder that gold is plummeting lower? And what makes it even more noteworthy, is that this report DID NOT PICK UP the plunge through $1600 on Wednesday and the subsequent further pressure down towards $1555 the remainder of the week.

Note also the sharp spike higher in the number of outright shorts among hedge funds. This week alone this group was responsible (through Tuesday) for a total of nearly 28,000 contracts sold when you take into effect both their long positions being liquidated in addition to fresh new short positions. My oh my has sentiment towards gold changed!

By the way, the outright short position in gold being held by hedge funds is the largest that I have in my records going back to the beginning of 2006. I do have further dated records but have not bothered checking them. Let's suffice to say, that it is the most bearish hedge funds have been on gold in SEVEN YEARS! When one considers that the Fed has pumped or will pump nearly $3.5 TRILLION into the economy by the end of this year, increasing the money supply exponentially, this is nothing short of an economic miracle to see gold so comatose. You have to hand it to these masters of the Universe at the Fed - They have suspended the laws of economics with supply and demand no longer meaningful.

Not only have they managed to kill the canary in the coal mine but they have simultaneously made it appear as if the canary, and everything else in the mine, is just fine and dandy. Welcome to the Brave New World of the Modern Day Alchemists. Apparently prosperity in a bottle can indeed be created. Pity the ancient Romans; if they had only had their version of the Federal Reserve. We all might be speaking Latin nowadays and Caesar might still be ruling from the eternal city. 


  1. Dan, is it safe to say that this is very bullish? They will need to cover at some point and then BOOM!

    Also could you make comment regarding the silver COT?

    Thanks for your work!

  2. Cheers Dan.... Do your figures and charts tell you who took the other side of those shorts? In other words, if the hedgies are assuming the price will drop, which party believes Gold will go up from here?

    1. Juan;

      Over the past 12 years, it has been the same drill in gold. The hedgies buy the market and as it moves up, the bullion banks (commercials/swap dealers) take the other side of the trade. On the way down, as the hedge funds liquidate and add short positions, the bullion banks and swap dealers cover their existing shorts (buy them back) and add some fresh longs. At some point the physical market buyers (Central Banks, India, the middle East and China) step in and buy in large size and bottom the market when the entire process repeats itself. AT some point bearishness in gold will reach an extreme and the market will bottom. As to when that happens, is anyone's guess. We can only go by the price action.


    2. Thanx Dan for taking the time to write up an answer. Much appreciated.

  3. The important part,wasnt covered here;
    i.e. The correlation between Naked shorts & gold price bottoms..
    gold ALWAYS bottoms on high gold MM (managed money) shorts which subsequently are covered.

    1. M;

      The important point was covered in the most recent post noting the silver COT.

      Also, you are making a false assumption.. you tell me when bearish sentiment can reach an extreme? How high is high? You do not know and neither do I or anyone else for that matter.

      The same people who are now calling for a definitive bottom based solely on the COT positions were doing that more than a month ago. At some point they will be proven right. In the meantime gold has fallen over $100.

      The COT is a lousy trading tool. It is there only as confirmation of POTENTIAL; nothing more. REad into it anything beside that at your own risk.

      One needs a spark of some sort to chase out shorts. If you get it, fine. If you don't, the market moves lower.

  4. Dan,
    did you look at the settlement price of the February contract? First the basis, now this? Could this be the beginning of a backwardation in gold?

    1. Endzeit;

      Feb Gold 1572.40
      March Gold 1572.30
      April Gold 1572.80
      June Gold 1574.50
      August Gold 1576.10

      There are now less than 1773 contracts left open in the February contract.... and less than 1276 left open in the March... liquidity is practically non-existent so at this point I would not put much stock in those contracts' prices. It is now better to focus on the April through the August where there is no sign of backwardation.

      The key for gold at this point is the size and scope of Asian Central Bank buying and Indian and Chinese demand.

  5. The negative Basis in Gold was discussed by Prof. Fekete at the Keiser Report (Keiser seems not to get Fekete's point about the current negative basis):

    ps: also the first part of the show with Stacey Herbert is very educational and enlightening about the LIBOR manipulation and the state of the legal systems.

    1. Endzeit - I am going to try this one more time. Gold is NOT in BACKWARDATION. If it was, the futures board would reflect it. Backwardation implies that prices for the near month are too cheap for the demand that exists and therefore buyers are ANXIOUS to pay up for gold right now rather than wait for prices to move lower. Currently there is a $1.70 DISCOUNT in the April gold contract to the June gold contract. That is a contango market, not a backwardation market.

      Gold is losing its sponsorship right now as some of the big names and big players are quite public about leaving it for greener pastures. What we are currently seeing in these markets is unwinding of carry trades and then the almost immediate application of those same trades right back on again, only to take them right back off.

      The volatility that we are witnessing in these markets right now is almost unprecedented in terms of the degree of intraday price swings.

    2. Yes Dan, but Fekete is not talking about backwardation. He is talking about the importance of the negative basis.

      Maybe paper gold is losing sponsorship, but the rapidly falling GOFO indicates a different development for the physical.

      Interestingly this also has been coinciding with the falling inventory @GLD, while the inventory of the SLV is constant or even rising, although price of silver declined even more (inventory of the GLD used tosatisfy physical demand?).


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