“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)


"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


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Friday, December 20, 2013

Commitment of Traders

This week's Commitment of Traders report for gold ( covering the period up through Tuesday of this week, 12/17/2013) reveals that the speculative community were net sellers on the week while the "commercial" traders were net buyers.

As many of you no doubt know, today's report both includes the sharp selloff associated with the previous Friday's jobs report. It also includes the sharp rebound that occurred on both Monday and Tuesday of this week. It does not include the wild action coming on the heels of this Wednesday's FOMC statement nor the collapse that occurred yesterday ( Thursday).

Here is what I am taking away from the report - speculators are using rallies in price to add to existing short positions. All three categories - Hedge Funds, Large Reportables and the Small Specs -  remain as NET LONGS. This continues to concern me because it indicates a STUBBORN bullishness in the face of a deteriorating technical price chart. Any downside violation of that critical support level at $1180 thus has PLENTY of AVAILABLE FUEL to provide large amounts of selling.

If there is any capitulation occurring in the gold market, it is certainly not showing up in the composition of positions that the speculators are holding.

While I am on this topic, I am going to try, ONCE MORE, to dispel this pestilential notion that the reason why gold is CURRENTLY moving lower is because it is constantly being manipulated by the bullion banks at the behest of the Fed.

This concept, which I have written positively about in the past and to which I adhere during PERIODS OF RISING GOLD PRICES AND A SINKING DOLLAR, is already becoming quite old and wearisome. It seems it makes some feel better as they watch their life's savings evaporate into thin air while they loudly screech that the only reason that they are losing money on their gold and gold related stocks, is because the price is being manipulated.

It is notable that this cry of "manipulation" only works in one direction however, and that is when gold is selling off. When gold is moving higher, there is not a peep mentioned about the sharp rallies that sometimes appear because "after all, gold is only doing what it should be doing were it not manipulated".

Here is the problem with this view, at this stage in gold's bearish move lower - the facts simply do not support it.

I have put together a couple of charts to illustrate this. Let's start first with an excerpt from the Commitment of Traders data, both futures and options, going back to the beginning of this year, 2013.

What I would draw your attention to in particular, is the end of the month of October 2013. This is about the time that the latest fad known in gold circles as "the Flash Crash" began appearing. Whether stated or not, it is implied that there is a nefarious force working to suppress the gold price and this force is always the same - the bullion banks working to do the Fed's bidding.

Keep in mind that the argument goes something like this.... " You know, gold is in backwardation, meaning that demand for the physical is so strong that the only reason the paper price can be moving lower is because it is manipulated. Also, these FLASH CRASHES that occur during the thin market conditions of low liquidity mean that NO LEGITIMATE SELLER ( whatever a "legitimate" seller might be is left undefined)  would be engaging in such action. Therefore, ergo, quod est demonstratum, the price is being manipulated lower. Why else would we see large offers coming out of nowhere?

Since it is always the bullion banks who get blamed for manipulating price, one assumes that it is they who are somehow behind this "mysterious" move lower in the gold price.

 



Regardless, I have maintained and continue to maintain, that it is speculative selling, namely HEDGE FUNDS or some other large reportable entities, that are doing the selling in gold and have been for some time now. I am also on record as stating that these same bullion banks who are constantly being blamed for everything nasty happening to gold, happen to be BUYING GOLD, not selling.

With that in mind, look at the above COT chart detailing the positioning of these large commercially-oriented players. This is their NET POSITION in the Comex Gold market. Now look at the date (Oct 29) in which they began to seriously draw down the overall size of their previously held net short position by BUYING contracts.

Over this interval, approximately a seven week time frame, there has been a reduction of over 37,000 in the net short position of the Producer category so that they are now NET LONG. In the Swap Dealer category, there has been a reduction of about 43,000 in their net short position. In other words, both categories have been NET BUYERS over the entire time frame during which, and this is important, gold has experienced a decline of some $115 in price.

Now look at the gold chart below to see the same time frame illustrated there.



This chart, unlike the COT chart above, covers through the end of this week, and not just through Tuesday this week. Since Tuesday the price of gold has declined even more losing another $30+ in the process.

Also, the CME Group, daily releases information detailing the delivery process for its various futures contract which still provide such. When it comes to gold, the December process has been ongoing. Out of the total 5,448 contracts Tendered or Issued ( by sellers who are delivering), J P Morgan, one of the infamous bullion banks, has stopped, or taken delivery of 5,106 of them for their HOUSE account, not their Customer account! That is no mean feat!

So what do we have? We have a source of data indicating a STEADY BUYING occurring by the large commercially-oriented players in the gold market so that their short positions are being covered even as they have moved to some LONG POSITIONS in the futures market so as to TAKE DELIVERY. One cannot take delivery of a futures contract if one is short the market going into the delivery period.

All this is taking place against a backdrop of falling gold prices while the SPECULATIVE COMMUNITY, is selling. Again, at the sake of excessive repetition, the specs remain as net longs but their net long position is declining as they bail out of gold and move to increasingly play it from the short side.

I should also note here that as the month of December has rolled around and the December gold contract has entered the delivery period, the number of OUTRIGHT LONG positions held by the Producer/Merchant/Processor/User category has increased from 89,853 to 90,760 as of this Tuesday. NOTE - this is using FUTURES ONLY data and not futures and options data because one needs a futures position on the long side to stand for delivery.

On the Swap Dealer front, the December long position has increased from 60,771 to 64,050 as of Tuesday this week.

It should also be noted here that as the longs take delivery of any gold, the futures long position is closed out ( as well as the short who was delivering) and the long positions (along with the short) will be reduced.

I want to also cover one more claim made by some who still refuse to accept the facts but will hold fast to their gold is always manipulated all the time thesis. Some claim that the bullion banks have been the ones recently selling gold futures to knock the price during the session only to then use the hedge fund selling that results as a way to BUY BACK or cover the shorts that they put on to precipitate the downward plunge in the futures market. The problem with this theory is that if the bullion banks were doing this ( and they currently are not), they would have to buy back all of those newly instituted short positions AND THEN SOME, in order to achieve the overall reduction in their NET SHORT position that the Commitment of Traders report details.

For example, if the bullion banks were to sell, let's say 1,000 contracts of gold, overnight in Asia and then wait for the inevitable hedge fund selling to show up so that they could then buy those contracts back, they would have to buy ALL 1,000 contracts or their NET SHORT POSITION would never budge. If they did not, let's say they bought back only 900 of those short positions, their TOTAL SHORT POSITIONS would increase by 100 contracts.

What the COT data reveals however is that the number of outright short positions of the Producer/Merchant category as well as the Swap Dealer category have been steadily SHRINKING since that October 29th date that I used as a reference point. Clearly this would not be possible if the bullion banks were only buying back some of these supposed short positions that are being claimed to be the source of the gold price manipulation. Even if they were buying back ALL of them, that would not be enough to REDUCE the number of outright short positions that they have on the books. They would need to buy back MORE THAN THE 1,000 in our example. In other words, they would have to buy 1,100 contracts after selling 1,000 overnight in order to show a reduction in their total short position of 100 contracts.  Thus, they would consistently have to be buying large amounts of contracts ( much more than they are supposedly selling according to some) on a regular basis to give us this constant decrease in short positions which the COT report reveals. It would take some near miraculous feat for buying of that magnitude NOT TO DRIVE THE PRICE OF GOLD SHARPLY HIGHER.

Here is the simple truth about gold as it now stands - the bullion banks try to slow the rise of gold during those periods in which it is rising sharply and the US Dollar is sinking as part of the effort to keep the gold price from signaling any sort of distress, distrust or lack of confidence in the US Dollar and by consequence, the Federal Reserve's stewardship of such. Once the gold price broke below the key chart support level of $1530 in April of this year, the trend in gold turned from one of bullishness to one of bearishness. From that point, specs have been gradually abandoning the gold market and moving towards equities. This is why the price continues to fall, not because some nefarious force has continually been at work in gold since then.

At some point the price will reach a level in which the market views strong value. When it does, the willing buyers at that point and price will outnumber the sellers and the price will bottom and then begin to rise.

One last thing for those who listen in regularly to the King World News Metals Wrap on a regular basis. We are not doing one of those this week and are instead giving Eric and myself a bit of a break.



22 comments:

  1. Great topic, Dan. I have been converted to your thesis made here for a little while now. And philosophically and psychologically this has done me considerable good, I think. It fascinates me to compare my attitude now to years past and recent months.

    So, for those of us who have lost money. Cheer up because the wisdom gained can be wisdom about ourselves and our mode of approaching things in general. And maybe if we are reading things rightly we will begin making money instead of losing. But don't get in a hurry. (I am telling myself).

    But on a different note. Here is another new whole concept. The large speculative crowd is (?) behaving, it seems, the same as market players like the small specs always have (?) in this respect: they are slow to change to the bear market. They are converting bit by bit. The hedge funds, as "brain dead" and "mechanical" as I had once pictured them to be, were gung ho gold bugs and are having a hard time capitulating (?). I mean, they have not all thrown the switch at once. Just like normal market players, the bear develops over time as does the bull. Hmmm.

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  2. Dan: U better take the rest you deserve. Happy Christmas holidays to u and family. ( Re:Eric, I am not sure he will join you to take a rest; he is still publishing these LBMA conspiracy related " shocking " news reports
    http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/12/20_LBMA_Chairman_Tells_Producers_Gold_To_Plunge_$400_In_2014.html )

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  3. I saw your commentary in the Gold Seeker Report today, I have always been a fan of yours but some of your commentary is simply uncalled for and I was very disappointed in your comments and derisive attitude. For my part I am long gold/silver equities and have a small physical gold position and silver position but am not of the view that $5000 gold will mean the end of civilization as we know it as you almost suggest in your comments. I find people like you are the scary ones not those who provide rationale and legit analysis of why gold could go to $5000 and why it would help the world, commerce, and provide much needed liquidity to balance sheets and countries who rely on resources for an important part of their economy. The monetary fabric of the world needs a higher gold price for not only what I outlined above but to try and get some monetary sanity back into the central bankers of the world and force some discipline of these economic academics who have never had a real job or meet a payroll.

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    Replies
    1. Wayne Rob;

      I did not post any commentary at Gold Seeker so I am not sure what you are referring to Wayne unless someone over there posted my comments from today.

      By the way, that was a typo on my part - it was supposed to be $50,000. I will go back and change that.

      Sorry you find me scary. I find those who keep telling many out there that gold is going to soar into the stratosphere any day now the scary ones. They have hurt a lot, and I mean a lot, of people.

      I am the one who has to read their emails and learn how deeply they have been injured as to their financial well being and even to a certain extent, their psychological well being. When people lose over 50% of their net wealth, it takes a horrific toll on them.

      At some point gold will bottom and go higher when the sentiment and times call for it. Until then, it is in a bearish trend. It is that simple.

      You can either accept that or not. Accepting it and acting on it when the chart called for it, would have saved many people from getting horribly ruined. It may take many years for these folks to recover from this brutal financial mauling that they have received.

      How you can so callously ignore the devastation inflicted on so many beggars my mind as only the most unfeeling and unsympathetic could not be moved by it. Maybe I should let you read some of the private emails I have to read. I think your condescending tone might change.

      AT least I hope it would if you have the least bit of compassion.

      Delete
    2. "When people lose over 50% of their net wealth, it takes a horrific toll on them."

      So maybe we will see gold price lose 50% from its high, i.e 950 $...if we are to see a capitulation; it's about psychological devastation.
      I think we haven't seen anything yet as many gold bulls bought progressively through 2002-2011, and on average, even if they are losing now, are probably not losing much yet.
      That's why they are still clutching at their long positions, in hope, and denial, that the bear market will stop tomorrow or the day after that.
      Nothing is for sure.
      So the real pressure will probably intensify and reach climax to most of those people if gold prices break through 1180...more selling, more waterfall decline.
      It's in all books of trading, the mechanisms of a bear market, and why most people sell at the lowest price.
      Despite all that, we may witness this once more in the gold market, quite regrettably :(

      Delete
  4. Replies
    1. campagnolo;

      That is Darth Dan to you buddy!

      Delete
  5. Dan,

    Merry Christmas to you and here's hoping for a turn around in the gold market for 2014. It's been a tough couple years and the chart could use a little painting in the other direction for a change!

    Mike

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  6. Dan,
    Coupled with my own personal realizations, your thoughts here are crystal clear and give a real explanation of what has happened.

    I think your previous comments saying gold needed a catalyst say it the best. What it will be in my opinion will be a dollar crisis.

    A good friend a metals trader who has been so bearish on gold since the end of 2011 just told me today that the mood is so overwhelmingly negative that he thinks gold will rebound in Jan. How high I have no idea. The thing that many bulls need to consider is that this market game the Fed has engineered has legs until the rest of the world starts to look at the dollar and says no more. It could be awhile and that is why your comments must be heeded.

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    Replies
    1. Concord;

      Yes, some sort of catalyst will be needed. I think it will still take the form of a loss of confidence in the ability of the monetary authorities to cure what ails the US economy by monetary policy alone.

      And yes, I do think it will involve the US Dollar. The problem is just as you state - we do not know when it will happen. We just have to watch and see how things develop and hopefully be sensitive enough to what the market is saying to recognize it at the time.

      About your friend the metals trader - sentiment in the gold shares is certainly overwhelmingly downbeat but I worry that speculators are still net longs at the Comex. That troubles me greatly because it indicates a stubborn bullishness in the face of a deteriorating chart pattern. I would actually feel a lot more comfortable about the short term prospects for gold were the speculative community already net short!

      Delete
  7. Concord

    I also know a commodities broker who has told me that the negative sentiment towards gold is now ridiculous. This is when the value players get interested.

    The Dow still has room to go up put is overdue for a correction….regardless of the fact that Bernanke has blatantly indicated the market has the backing of the Fed.

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  8. Dan I am one of those that lost 50% of my account due to following certain prominent gold cheerleaders, and especially one, whom was considered to be the bard in the industry. The $5000 pronouncements were loosely thrown around, and in a most cavlier manner.
    What an incredibly painful lesson that was. Now I just look at the charts, and with gratitude that I have you to guide me through this process.
    I wish you and your family a blessed Christmas.

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    Replies
    1. John Andrew Szokolay;

      I sympathize with your plight - I really do.
      I see something similar at times in the grain markets among certain analysts in that sector. They are always wildly bullish, always looking for reasons to be bullish, etc., instead of reading the charts.

      the problem there is that many farmers listen to their stuff or read it and then refuse to sell portions of their crop or at least get some hedge protection because of all the bullish slants to their analysis. In the meantime the price of the grains continues to move lower and the poor farmers end up selling into a hole. It could have mostly been avoided by being judicious and remaining Objective - something which is perhaps the hardest thing for we human beings to do.

      Merry Christmas to you and yours as well John.

      Delete
  9. Your work has saved me alot of money and I appreciate it alot. I would say that this (avoiding getting hurt) also helps me to continue to look at gold equities in the future, the capital is intact and I watch this sector as I watch others but greatful for having your input as one of the things that guides my choices.

    I would like to encourage you to write even more about other commodities and sectors where you see possibilities technically during 2014.

    You did really well 2013 and KWN did me a great service by helping me find your blog.

    I hope you, your family and your readers have a great holiday and a good 2014.

    Johan

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    Replies
    1. Johan - Original Braila;

      Your comments are very encouraging and I appreciate you taking some time out to send them.

      That is what we are trying to do here - teach folks to understand how the markets work and to read the charts so as to BOTH protect their investments and to have sufficient capital left to TAKE ADVANTAGE of bargains when those are presented.

      I do trade a lot of other different commodities and might start commenting more of some of those next year.

      Merry Christmas and a Happy New Year to you and yours

      Delete
  10. Dan I would like to know your view on the 92 to 1 claim on the Comex deliverable gold as posted over at Jesse's.

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  11. brokerthendirt;

    I hope your "handle" is not the result of owning too many mining shares in your portfolio right now. I know we can make some jests about it but it really is a horrible thing that so many owners of these shares have undergone. Watching one's net worth disappearing has a profoundly debilitating impact on the psychological and mental well-being of folks. Some marriages are even impacted by this sort of thing. I mean that in all seriousness. Money strains can negatively impact a relationship between husband and wife.

    The spouse making the investment decision carries a huge internal load of guilt because he or she feels as if they have let down the other. It does impact things - that is why this thing that has occurred in the mining shares is so serious. The kind of devastation that we have witnessed in the sector is horrendous on so many different fronts.

    I do think that there are some who will never ever touch another gold mining share as long as they live. They will either buy physical gold or perhaps even the gold ETF if gold begins to bottom and show signs of life, but many having been so severely burned by these miners will swear off of them forever. I also think that in some cases management deserves a great deal of blame. They were STUPID NOT TO HEDGE some of their production at higher levels when the chart pattern clearly told them to. It is an unfortunate fact that most gold mining CEO's are horrible at price predictions. Prudence should lead to their hedging decisions ( not public opinion by those who are always bullish on the metal's prospects).

    not sure why I got sidetracked on that but to answer your question - Jesse does good work and someone I consider a buddy. There is no doubt that some entity/entities are buying the gold that is being dishoarded by Western-based investors. For every seller there has to be a buyer. Could be China.

    That simply means that the gold is moving from West to East. That obviously has long term implications so for those with ONLY A LONG TERM PERSPECTIVE, it is a friendly development as far as price goes. It does not mean however that gold is ready to take off and move exponentially higher merely because of this. It means a transfer of ownership is taking place. You have a growing population that is moving into the middle class in China and with that carrying a love for gold that is different than the Western mind set towards the metal. That bodes well for future demand prospects. Also, there is some thinking that China is working to acquire enough of the metal to offer some sort of gold -backing to the Yuan.

    For a trader or an investor with a short term or intermediate term perspective, it is still NOT a reason to buy a market that is clearly in a BEARISH DOWNTREND. Traders by the nature of their profession have to take a shorter term view of things because of the enormous impact that a LEVERAGED bet on prices can have on their portfolio. Right now I do not see any let up in the downside momentum on the gold chart. That could all change rather quickly but it would require some sort of catalyst/trigger in my view and I currently do not yet see one. Hopefully, if one arises we can have enough insight to be able to spot it when it occurs.

    Hope that clarifies how I see this.

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  12. Thanks for the thoughts, I will survive. I'm having a hard time getting my hands around the fact that the historical average for claims/oz. Is somewhere around 15-20 while the number has shot straight up in a relatively short time. As technical trader whenever I see a chart so far off the norm my first question is "why." Thanks again for taking time.

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  13. Dan, How about the Bloomberg article today that does a great job of explaining just how the gold price manipulation is being brought about?

    http://www.zerohedge.com/contributed/2013-12-23/bloomberg-how-keep-banks-rigging-gold-prices

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  14. Very well said. You have provided the most simplest but informative and helpful ways about futures and options I really learned a lot. Futures and Options represent two of the most common form of derivatives.one of the recent successes in the Indian stock market is the widespread popularity in the exchange traded derivatives segment.

    ReplyDelete

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