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.