"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


Saturday, May 25, 2013

Speculators continue to Sell gold

I will get some more details on the Commitments of Traders report later this weekend but wanted to get a graphic up to show just how strongly speculative sentiment here in the West has turned against gold (no doubt that is every bit tied to the bubble in the equity markets, courtesy of the Fed).

You can more or less see the sentiment towards gold by looking at the upper solid dark blue line which dates back to 2006. It rises and falls along with the actual price of the metal. Can you see what direction that line has taken since late 2012 when gold was priced near $1765? It has been steadily declining with a few upward blips. That indicates the outflow of speculative money from gold which as we all well know by now, has been heading into equities in search of yield. Incidentally, you can see the same thing in the gold ETF, GLD, with the steady drawdown in the amount of metal in its holdings.

Now focus on the bottom red line which is a mirror opposite of the upper blue line. You can see that it bottomed out at the same time gold peaked near $1765 on the chart and has been relentlessly climbing higher. That is FRESH SHORT SELLING. Can you see how the hedge funds are building on the short side of the market? As a matter of fact, this is the largest outright short position of that category of traders on record!

Folks, I have to say something here at the risk of irritating some others in the gold community that I consider to be friends. Many keep pointing to this fact of a building speculative short position as a bullish development. It is not. It is bearish. Why? Because as I have stated ad infinitum over here, Speculators drive markets today, not commercials. As long as the specs are interested in selling gold, the market will struggle to overcome chart resistance levels and reverse to the upside. Yes, there is definitely the potential for some strong and sharp short covering whenever you see specs with a building short position, but it requires a CATALYST before that will occur. At some point we will indeed get such a catalyst (we got a preview of it this past week at the introduction of Bernanke's speech when he mentioned that a premature slowdown in QE would not be wise) but until we do, the trend is very obvious.

Let me just say that as a trader, not an investor, and please note this vital distinction, unless I have deep and unlimited pockets, for me to go against the flow of hedge fund money, is financial suicide. This crowd can run over commercial interests and send them crying to their mammas. How in the world are you or I as smaller traders going to be able to handle that sort of selling pressure? No, we have to be wise and only take a contrarian position if the technicals are telling us that it is time to do so. When those guys reverse course and begin covering, it will not come in a stealthy manner!

There is a tendency among some to keep saying over and over again: "this growing short position is wildly bullish". The implied notion among some advocating this (not all of them) is that you should jump in a take a long position in the futures because they just know that the market is going to suddenly reverse to the upside and you will miss the big move if you don't. Well, it may just do that. Then again, it may just not! What if it does not? Down it will go and down will go your trading account with it. Instead of buying on "HOPE" wait for the chart pattern to indicate that a turn is at hand. At least that way you can mitigate the risk somewhat because you will have a definite chart point at which you can tell whether or not the trade has gone wrong.

Again, I want to repeat, this is intended for those who are trading not those who are investing in gold or buying it to protect themselves from the debauchment of currencies which is occurring. The latter group buys gold for peace of mind and will methodically accumulate the metal as price moves down. That is a far cry from buying a LEVERAGED futures contract.

In summation - hedge funds here in the West are selling gold on rallies with strong quality buying emerging on trips back down towards $1360 and below. That buying is coming from the bullion banks and swap dealers in the paper markets. We all know how solid the demand is at those levels in the physical markets, especially in Asia. This looks to be the pattern until proven otherwise by the price action.


  1. http://s16.postimg.org/7q5ev5gxx/gld.jpg

    - prices capped by the median.
    - reduction of volatility means probably prices between the 2 orange segments. If they break through --> acceleration.
    - MACD 9 20 7 is about to give an indication

    IF the BLUE LINE is valid within next days and proves itself to be resistance, I think we should be very careful because price action would be so weak that 1340 are likely to be tested again.

  2. If anything can be learned from the last two years:

    1. Never fight City Hall

    2. Eventually, the Fed and the Wall Street chieftains get what they want, "for the greater good".

    3. Speculators can bet against the Fed for short periods of time, but never over the long term.

    4. Next time the market bottoms after a deep correction, financials and consumer stocks offer the path of least resistance to make large amounts of money on the long side.

    5. Betting against the world's currency is a fool's errand.

    6. Massive money printing, reliquifaction, and QE programs that create a huge wall of liquidity ultimately flows in the direction that the Fed wants it to: sectors which are most favorable to boost consumer and business confidence (i.e. retail, consumer discretionary, industrials, etc.)

    7. Investment options which are out of favor with the Fed's agenda (precious metals, bets on sovereign defaults, bets on inflation or large market dislocations) can be pushed against the speculators indefinitely due to the Unlimited Fiat Power of the Fed and other central bankers.

  3. I still hold to my belief that the bullion banks are setting up the specs for one more move to the downside before reversing the trade. The bullions banks are perfectly fine letting the specs make sure gold doesn't get a 14 handle on it. Heck , they may even be the ones pushing it down right when the shorts look like they are getting scared.

    Bullion banks want to suck in little bit more spec OI before flipping the trade. They want specs to see all the "easy money" shorting PM's. In other words, get them into full out greed mode. I'm thinking 1200 to 1250 and a HUI retest of the 2008 lows - which I think will hold and be the bottom there. Bullion banks really have to step on the gas to get their desired reaction these days.

    1. Willy-D. Obviously this is possible--It seems that the rule of the day is, if you can name it, the miners will sink to it. First, it seems that the miners are suffering like all companies (AA, GE, CAT, FCX) that are predicated on intensive capital. As has been noted, QE creates a monstrous misallocation of capital.

      That said, 168 HUI and 1250 gold would lead to a HUI:GOLD ratio of about .133...A 10% drop in gold and a 34% drop in the HUI. The argument of course is that miners with all in costs of about $1,200 would be "worthless". There are plenty of companies that temporarily operate at losses (HPQ, airlines). Nevertheless companies have been adding value in the form of greater shareholder equity and larger dividends. E.g. Goldcorp. Since 2008 the company has diluted itself about about 13% with additional shares, yet their balance sheet equity is up over 50% in the same period. That might not be spectacular given the fact that given gold's rise...but the overshoot of the market to the downside will give long term investors a margin of safety.

    2. I like Yamana sub-10. Go all in on long term calls. Lowest costs, best management, good risk profile.

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  5. Thanks Dan, this is one of your classic keepers.
    Into the trading file.
    Thanks, John

  6. I’ve been spending hours trying to figure out this “massive COMEX short position” of 79,412
    Where in god’s name do they get this from?????
    What I read from the COT report is the commercials have dumped 3.81% % of the shorts on the others and grabbed 14.3% of the longs and increased their share of the total game by 9.44% ( to a grand total of 68.58% ) while telling everyone that the game is dead and soon to be 22% lower
    The long/short game is net zero
    COT reports April 12 to present
    Futures and options

    1. Ian Thomson;
      You are looking at the wrong data... look at the Disaggregated report.
      Trader Dan

    2. the numbers still do not add up to 74432 net
      The commercials are 84122 net short (futures) @ May 21st down from 143802 @ April 9 I
      In futures options combined Commercials are net 67821 @ may 21st down from 137264 @ April 9
      Combined Futures and Options the commercials longs are up 14.31% shorts are down 3.8% and they have increased their total position shorts and longs 9.44% since April 9th taking the most from the large longs 11.51% and dumping 3.07% of their shorts on the large.
      So as I see it they (Commercials) have taken almost 10% more of the gold futures and options market mostly by buying longs at ratio of 3.77 to 1 dumping shorts. Considering they are proclaiming that the gold market is dead and collapsing they are in fact taking 10% more of the total market yet still retaining their control of the shorts and vastly increasing their long position. If I was running this carnival that's how I'd do it


    3. these charts and data are taken from bloombergs cfcdumms index
      Exactly what is this index? and what data does it use? Where can I find it?

    4. Ian G Thomson.

      This is the last post I am going to send to you in response to your comments. I do not have the time nor the inclination to deal with this. The data and the chart I have presented are accurate. It comes directly from the CFTC website. You can argue with that until you are blue in the face but the facts are that the combined options and futures positions of the large hedge funds (Managed Money) category is exactly the number I have stated.
      Frankly I do not care whose website or which other commentators you are relying upon to come up with your conclusions.

      I have been at this for more than 24 years now and was analyzing COT reports back when they came out only on every other week. More and more I see internet based newsletter writers proclaiming themselves as some sort of new mystics that possess some esoteric knowledge about the future direction of the market based on their superficial comments on the CFTC reports. All one has to do in order to realize that most of these guys could not trade their way out of a wet paper bag if their life depended on it is to read what passes for their wisdom.

      Every single comment they make proclaims how bullish the setup is for gold because of the large hedge fund short position. They have been saying this since gold was at $1600 and descending. Eventually they will get it right. In the meantime, anyone who blindly follows these novices and takes a long position in the futures market based on the COT report is an accident waiting to happen and will no doubt have a very short career as a trader.

      Until the bid hedge funds reverse course and begin covering and playing gold from the long side, the COT reports merely confirm the trend of speculative selling. I would watch support and resistance levels far more than I would the mystics and their worthless COT analysis.

      Is that clear enough?

    5. the data and opinions are my own. The web sites were merely sources of data. I was hoping that you would be able to clear up some questions "I had because clearly there is allot of BS out there. Obviously I was wrong, but at least I now have an idea of who and what the "hedge fund " data is and where to get it.

    6. Dan,
      Don't be too hard with Harvey Organ...oops, did I mention anyone by mistake :)

  7. Thanks, Dan! Another magnificent post!

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  9. Prices could be suppressed by China using manipulation of future markets. They need their 4000 tons of gold

    Last part of this is very interesting

  10. Sure do appreciate you Dan.

  11. Dan, first-time comment for me so to begin with, many thanks for your site.

    Two questions.

    First, do you see any significance in the divergence between fresh highs in spec short positions and (so far at least) the failure to make new lows?

    Second, any thoughts on the significance of the fall in "Transparent Gold Holdings" (total ozs held by published repositories, mutual funds and ETFs)?




  12. John Williams is interviewed! Gives fundamentals and some clear economic and financial overview and predictions:
    After James Turk, his spot is from 25 minutes into Chris Waltzak's Friday show until 1hr1min mark:

  13. Thanks Dan!

    Could you please inform how to get data for graphical picture in this presentation? I have looked around but I can not find this very valuable information.

    Gunnar/ Stockholm

  14. Here we go again with more "Wash, Rinse, Repeat".

    They spooked the herd again with the Nikkei selloff.

    Now it's back to "Green Shoots and Goldilocks" as stocks are once again soaring and gold is getting sold off.

    Bernanke and Krugman must be swilling down some Red Bull this morning, they cannot believe that Central Banking has become so easy.

    They don't even have to utter any "words" any longer, the market already knows what to do after being pre-conditioned for 4 years like Pavlov's dog.

  15. Dan,

    Whilst I appreciate it is the hedge fund category and not the commercials that drive the futures market, is the large build up of the bullion bank long position not worthy of comment? It seems surprisingly odd that Goldman would release bearish forecasts only to then take the long side of the trade. It would suggest the insiders might know something the rest of us are not privy to.

    Thanks for your great blog.



    1. Sam - speculators drive markets, especially large, well financed specs such as hedge funds. Until something changes to change their sentiment towards gold, they will continue to sell rallies. I view their trend of selling as bearish for the market until proven otherwise. That means we need at least a handle of "14" in front of gold that will not drop back to "13" before those guys begin to cover their shorts and maybe even throw some fresh hot money at this market. They are all in love with risk free equities right now so why do they need to buy an asset that is not throwing off any return? Not until the fear of inflation hits them will they run for cover.

    2. Dan,

      Thanks. My confusion was due to the many commentators talking up the supposed bullishness of current developments in the COT report. You have dispelled the myth that an increased short position amongst the hedge funds is somehow bullish, although I do still wonder about the other side of the coin - in other words, what the bullion banks are up to exactly in "talking down" gold publicly while accumulating long positions. Nevertheless, I appreciate your comments that until sentiment amongst the hedge funds changes, rallies are likely to be sold (indeed, as we have seen today).

      Best wishes


  16. Money coming out of bonds - going in fresh into equities. I think this one goes up to 1700 and then 1800.

    I think the specs want to make one more good run at 1325 before giving up and heading for the door.

  17. You knows those criminals are going to take the specs fishing at least one more time. BB will start a selling frenzy to suck in every last spec dollar on the short side. That will be my and your time to get in. I think if intrinsic spec action takes it below 1350 again, that it will make a beeline test at 1325. How it reacts from there is a tell.

    You see how the bulls tried to take them fishing the other day? Spiked it up to 1400, but didn't hold. Bulls have no balls. They went fishing and got pounded on... again. Will make downside break to 1350 here. my .02

  18. Don't look for help from the demand side. India premiums halved from $10 to $15 at $5 to $7 / oz over spot. India well supplied with gold at the 1380 spot level.


  19. u donkeys do not get it; steve briese has been publishing his cot stuff 35 years; read his book; btw, if his stuff was that good then why is he not trading instead of publishing? it is a helpful tool, especially at critical blow off and sold out turning points, but for the most part it is just stuff, nothing more and nothing less; use your own heads and get out of the arguing , regards, steve of sparks, nv

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