“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 6, 2013

Gold - Commitment of Traders

Hedgies continue selling across the gold market ( at least they did before Wednesday this week - after that they were doing some short covering). In a near repeat of last week's behavior, they did not liquidate all that many existing long positions. They continue to gradually rid themselves of those, which is a bit surprising to me. What they are doing is adding more short positions as they maneuver to play gold from the short side.



I want to emphasize that for all this, this group still remains net long the gold market and has been since the inception of this particular reporting data going back to the summer of 2006. One thing to point out however, is that their overall net long position is the smallest since January 2007. Translation - hedge funds have not been this bearish on the prospects for gold in nearly SEVEN YEARS!

One could perhaps make a contrarian argument based on that fact but even contrarian arguments need a fundamental spark to turn sentiment. Unless sentiment towards gold changes for some reason, these specs will continue to sell the metal into rallies as they play more for the gains in equities that can be had versus tying up investor capital in an asset that is not throwing off any gains whatsoever right now.

Here is the overall COT Chart. Note the area within the ellipse.



Once again we see a continuation of the recent trend of overall net buying by the Commercials who have decidedly moved into a net long exposure to the gold market.

Swap Dealers are also buying on a net basis as they continue to reduce their overall net short position but they remain rather sizeable on the short side of the market. My thinking on this is that some of them are working hedges against custom made contracts for some mining company hedges.

The interesting thing is the little guys or small specs. They are net long, but ever so slightly! this report shows them with a combined futures and option position of 16 contracts on the net long basis! The last time they were actually net short this market was back during the same time frame that the spike low at $1180 occurred this past summer.

So what do we have? Speculators overall remain net long the gold market but continue to abandon the metal in favor of stocks. The Producer/User/Merchant/Processor category is now net long with Swap dealers still net short. Basically the short interest in the market is being held by this group.

After this week's wild gyrations and theatrics, there no doubt have been some consequential changes in the composition of the various groups of traders. I have my suspicions as to what took place but that is just an informed guess on my part. We will need to see next week's data for a better look inside this market.

Unlike some others who seem more obsessed with what the Commercial category is going, I am frankly far more interested in what the SPECULATORS are doing. They drive markets, not commercials. The fact that they are still net long overall concerns me in the sense that while bullishness towards gold is certainly on the wane, we have not yet seen a DISGUST with the metal that tends to make capitulation phases. Too many speak of capitulation in gold. How can that be when speculators remain as NET LONGS???

It may not seem probable right now, given the backdrop of massive QE, but I wonder whether or not we will actually see the hedge fund category move to a net short position in gold as they did in silver. I certainly hope not as a long term proponent of honest money but I rule out nothing in this environment.

Sentiment in regards to inflation fears/confidence in the Dollar must shift for gold to attract eager Western-based buying. Also we need to see Velocity of Money to increase and wages begin to actually rise instead of remaining stagnant. I am not sure that one or even two payrolls reports are going to get that for us.

I think we will see when Western-based demand for gold resurfaces when/if the reported gold holdings in those gold ETF's stop declining and start rising.

23 comments:

  1. Tom Petty had it down...The waiting is the hardest part. I've been this for over a decade, I'm fine holding pat but there's no fun in that.

    ReplyDelete
  2. Hi Dan

    Is it possible that you could ever describe your trades that you do on a given day ?

    Precious metals, Agricultural commodities, etc.

    Once you put your money into a position, when do you pull out & why ?

    in the case of both a profitable position & a loss position.

    Not to give away any major trade secrets, but just for us long term investors who work in other fields to understand what a commodity investor does on a typical day.

    Thanks !

    CopWatcher

    ReplyDelete
    Replies
    1. Cop Watcher;

      I will sometimes shift my views of a market two times in a single day depending on the price action and how I am reading the price action.

      I trade quite a few different commodity markets but focus more on the livestock and grain markets because I cut my trading teeth on those and I still believe that they remain the "purest" markets from a fundamental perspective. At my core, I am a fundamental trader and always will be but I have always relied on technical analysis to either confirm or disabuse me of my interpretation of the current fundamentals.

      One thing I tend to do is run very quickly if a trade does not go my way. I hate huge losses and try not to allow those to occur. They are career killers for a trader. I do not trade in too large a size unless I am confident in my position and price action confirms that.

      today's markets are too volatile to build a long term position and just ignore it. Things change too rapidly and leverage can work against you very quickly.

      One thing I do not do is to trade markets that I do not understand.

      If price action makes no sense to me, I either get out or reduce my position to a very small level. I tend to be very cautious. That comes from getting my rear end handed to me over the years. Getting burned a few times is good instruction! One thing I also learned - never fight the Bank of Japan!

      They beat me senseless on a yen trade many years ago and put a whipping on me that I have never forgotten!

      As far as revealing any specific trades, I would prefer not to do that. Those reasons are more for compliance reasons and to preclude any issues associated with that.

      I think most folks can sort of read between the lines to get my views of the various markets that I comment upon. I am bearish when support levels give way and bullish when resistance levels get taken out...

      Delete
  3. Hi Dan,
    Hats off for the density of your posts and explanations!
    You are among the rare real traders I know who share so much of their knowledge in the same time, one more time, all for free.
    I'd agree with Cop Watcher, though I think giving intraday trades would be most difficult for you to share, while focusing on screens and indicators realtime. But if you make a trade on the longer time unit someday, like having a signal on a weekly close confirmed by daily candle action...I'm "buying" :). But I'm certainly not pushing to ask you for that :)
    The bet is sharing this kind of information won't push people to simply follow without thinking, but help them better understand how to trade from A to Z.

    ReplyDelete
  4. Small chart of gold, daily time unit.
    Quite interesting.

    http://i44.tinypic.com/2emg945.jpg

    1) the pitchfork traced just a few days ago is valid at the moment. Prices have been bouncing on its mlh inf every day since then.
    2) prices are capped by both ma20 and ema15. A pitchfork's target is its median, so if we are unable to break through even the ema15, it's really not bullish for gold. Yet...I remember that on the weekly time scale, the red median of downwards pitchfork (a really looong pitchfork) is still working as a support.

    Conclusion : same. We are on an important support area because of conjonction of several supports, long term and short term, around all this 1180 to 1220 zone. There is no conviction of a bounce on gold prices, which keep drifting slowly lower, following the trend on the red weekly time unit pitchfork. As long as it is the case, despite the support area, I'm not going long in this market.

    ReplyDelete
  5. Here is additional chart on the quarterly time unit.
    I took a liberty for the Fibonacci retracement : I didn't take into account the final spike of 2011. I find it interesting this way, because then, retracements are matching with key horizontal support levels which were there on the way up. Also, this frenzy of 2011 can be seen as an "anomaly" on this time unit. So, not very conventional, but that's how I traced this Fibo retracement long time ago now, and look : 1225 is a retracement support level on this time unit (and on the 2 months as well). That's why for me the battle around 1225 is very important before the end of the year. Bulls had better save this support for the long term perspective imho...
    (I'm open to share your critics about my TA :))

    http://i42.tinypic.com/2u6fbbc.jpg

    ReplyDelete
  6. Last but not least, I'd like to share with you the chart of gold which makes me MOST pessimistic for the "long-term", i.e the coming next months.
    It is the 2-week time scale, because of price action compared to CDUR indicator, plus the MACD.
    Reminder : the CDUR is a cyclical indicator which indicates me if there is a trend, and if this trend is still strong or waning.
    (if you want the codes, write me on hergastul@gmail.com and I'll put you in relation with Gilles Leclerc @ Johnlee, as he is the one trader from whom I learnt about this indicator)
    It is important to understand that sometimes prices simply won't respond to CDUR cycles, meaning there is no trend here, not much to do regarding trading on that or that time unit.
    But here on the 2week time unit, it's not the case. On the contrary, we have a trend and CDUR is confirming me that it is not waning.
    Of course, one indicator is not enough to confirm anything.
    I'm not making a trading decision only on this time unit either, but watching shorter time unit. But at minimum, this chart should scream : careful! to the bulls about the current support area.

    http://i44.tinypic.com/ra3orb.jpg

    Indeed, when CDUR drops, prices dropped.
    When CDUR reversed up, prices...lateralized.
    So the trend is down, not waning, and now CDUR is reversing down again...

    ReplyDelete
  7. Hubert Du Haut:
    The trend is obvious in the charts. On one chart, there is stair-stepping down which is a strong trending pattern when either up or down. The fib-lines are just as telling as any other method is maybe more so. Putting fibs between/on the whole hundred numbers ex. 1200 and 1300 will get price resistance levels (depending which hundred then gets the zero starting point when betting on up or down). Then there is lower highs as resistance levels are not be broken through on the upside moves. Occasional sideways consolidation formations until the trend down continues, that is about it except for the wild minute by minute chart action transforming into swings. Boring unless you day trade or are short the market i.e. gold and miners. Painful if you are holding and waiting it out for the bottom.

    ReplyDelete
    Replies
    1. Agreed. So if this major support zone breaks, we may be witnessing another big fast drop like the 1520-1320 or 1300-1180 ones.
      The H&S neckline 1270 gives a target of 1110, of course it's theoretical, but anyway...there would be no floor Under gold prices if 1180 give way. Hedges know that. If Miners then disband like scared rabbits and hedge massively, we may indeed see a massive blow in gold prices. Hedge now (puts, out of the money like 1000 or less, with 3 to 6 months exercice for example), sell a bit now, or make sure your strategy is to have also some cash and not be already 100% full position in gold now (suicidal!), in order to buy more when /if prices finally bottom (maybe sub 1000?).

      Delete
    2. Of course, one can also choose to feel more heroïc and simply count on the dawn of the third day, watching to the East and waiting for Gandalf (Jim Sinclair and his SGPMX Rohirrim?) to overrun the Bearish Army.
      As a gold bull, right now with my physical, if I were unhedged 100% or too much into gold vs cash, I would definitely feel just as the guys in the castle below :)

      http://www.youtube.com/watch?v=XrXqQjJPcqQ

      Don’t make me wrong : I admire and support Sinclair's fight. He lost an eye during a previous one, so he is a veteran fighter, no doubt. But I'm not sure who will have the advantage short-term and whether or not those important supports around 1200 will hold. Should I rely on faith, or money management? I chose the latter.

      Delete
    3. Hubert;

      Where's Frodo - I mean, where is he???

      Delete
    4. Hubert Du Haut:

      Fib-lines will show the dead air gaps where prices fall through a vacuum, depending on where you place the zero point, long and short term. According to fib-lines, it is always the same areas/price actions while only the bottom or when will it end comes into question because a retrace does not have to 100% but should never be a surprise if it does.

      Delete
    5. Dan,
      Frodo is not to be found, which, like in the book, is a very good thing. But I'm looking for 2 small men in the real world that could correspond to the description :)

      Delete
  8. Here is an email I sent to a friend. He didn't understand why Goldman would go on the other end of any hedging program. BTW Dan is absolutely right. By the time this is all over on the downside we may see just about everyone short. Except of course, the bullion banks. Think of the potential upside explosion....
    ---------

    Firms like Goldman and JPM think longer term when it comes to gold. As I always say, gold is much different than any other commodity.

    In this instance, Goldman sees prices fall from 1900 to 1200, and understands the trend longer term will be up. Even I know gold prices will ascend once again. However, much of the technical damage is done. Even if gold drops to 1,000, that's only 200 more. It has already dropped almost 700. In fact, I have let off the size of my short, as this trade is getting tired. I have made about 70% of the potential profit already. I am short in my trading account, but only to the extent of my physical holdings. As a trader I only care about the shorter-term moves.

    So, GS agents work to get control of a large miner like Barrick and its future production by hedging and taking the other side. Barrick sells short, Goldman buys long.

    If what I think happens and we see gold touch 1,000, Thornton will make sure that Barrick hedges production at these prices and lower. Perhaps Barrick hedges several years worth of future production at these depressed prices. Then GS knows that gold will go up, and when it does it gets all of this future production on the cheap. In fact, if what I think happens is true, much of Barricks hedging will occur at even lower prices, as GS is on record as saying that gold at the end of 2014 will be below 1,100/oz. I agree with their analysis, but not for fundamental reasons.

    Why? The west believes that the world economy is undergoing a miracle rebirth. It's all rigged, of course, but that false hope should allow gold to fall even further. There will come a time in the next 2-3 years when this realization will be proven false, and gold will go back up, but that is out into the future. Goldman knows this and is positioning itself to benefit. So, publicly it disparages gold to get prices as cheap as possible, while quietly positioning itself for a sharp rise in the future.

    BTW, don't worry, I will tell you when to go long. And don't buy the miners or silver. Buy gold....

    ReplyDelete
    Replies
    1. Eph 6:7;

      That is well thought out and well articulated. I could not have said it any better. That is precisely what the bullion banks will do. My friend Jim Sinclair long ago said that they would be long gold before this was over and he was right about that.

      I only wish that more people who followed the gold market understood the difference between short term, intermediate term and long term trends. It would save them a lot of serious losses.

      Delete
    2. @Eph - Nice post. I got the "I will tell you when" as it's a letter to a friend. RE the miners. Generally agree. In fact, I would add that since the inception of GLD in 2005, Gold has far outperformed even the best miners (former best of breed companies like GG). The exception are the royalty companies--RGLD & FNV, which to date are pretty much equal to gold since '05. You also get about a 1.7-1.8% div respectively at current prices--it would seem that they would be worth looking into when one goes back long into gold. Make sure your friend buys physical or physical backed fund (which would go from discount to NAV to premium if & when the bull returned & so add a bit of return + safety to investment).
      @Hubert du Haut - My thought on your TA is that as long as it's rigorous, it adds info/indicators, and so a plus. TA, Cycle counting, & fundamental analysis all have the virtue of detaching one from one's emotions and prevent one from acting from fear & greed and so less likely to buy high sell low. And for you Steve, That is all.

      Delete
  9. Dan, honest question here. I read both you and TF to get a balanced view on the metals, and you say that the GLD ETF drain is bearish for gold and gold prices will not go back up until this ETF begins to replenish itself. TF says that the gold from the ETF is being liquidated and sent east never to return. I tend to agree with that point. Does the west even have the gold left to refill the GLD? IMO no, but I'd like to get your thoughts on the gold heading east. Thanks Dan!

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    Replies
    1. Adam Jantzi;

      That the gold has been moving East is no secret. We have all known for many years that Asian demand for gold is what puts the floor under the price of gold.

      However, it is never a good sign for the price of gold when Western investment demand for the metal is so weak. Investors here are looking for gains and those gains have been in equities. Gold throws off no yield so the only way one can make "yield" on it, (other than leasing it out) is for its price to rise.

      That has not been happening since gold entered a bear market when it broke down below $1535 some time ago. At that point, it was a signal that prices were going to move lower, Asian demand or no Asian demand. The proof was the dishoarding of gold from those ETF's. The West simply did not want or need the metal.

      For every seller, there is always a buyer Adam. It just depends how much the buyer is willing to spend. If there are more sellers ( a bear market) ,then price has to fall to entice the buyers to come forward.

      As long as there are more willing sellers the price drops until at some point, there are more willing buyers at the lower price level. That is when the market bottoms.

      The problem I have with so many of these gold sites out there is that they are always bullish, no matter what the price action on the charts is saying. First, they were pushing the Backwardation claptrap. Then it was the negative lease rates. Then it was the whistleblowers which were going to come forward sending gold to the moon. Recently it has been the COTreport. All the while the price of gold continues to sink lower and lower.

      At some point, the market turns and then these same gold sites all start crowing like roosters how right they were. Meanwhile, they have decimated the wealth of those who swallow their latest fixation.

      Look, one can have a long term view of the metal. I certainly do. But that does not mean that they cannot be a realist and understand when being on the LONG side of a market that is sinking is flat-out insane. It is a recipe for watching one's wealth evaporate. Money is too hard to come by to allow some of the crap on some of these sites to cause some of the victims to sit there and watch their losses mount higher and higher instead of getting the heck out of a market when the trend changes and then WAITING on the SIDELINES or going short for the long term trend to eventually reassert itself.

      When the market bottoms, and it will at some point, hopefully, we will be able to spot that and trade accordingly. Long term I do look for much higher gold prices. I believe that is inevitable. In the interim however, I have been around long enough at this game to understand that markets ALWAYS overshoot both to the DOWNSIDE and to the UPSIDE.

      My goal here is one thing and one thing only - TEACH people how to READ THE MARKET and to tune out the rest of the junk out there. The name of the game in trading is to make money; not to sit there on mounting losses because you just know that "any day now the price of gold is going to soar straight into the atmosphere" because some whistleblower is going to spill the magic beans or because the Asians are buying up all the gold. That is all well and nice but as a TRADER, it is utterly useless. Price action is what we are interested in. That and that alone tells us when the herd is on our side and when it is not.

      Delete
  10. Dan, I really appreciate your comments. I currently have a pile of cash sitting in my trading account that is waiting for the miners and NUGT to bottom. Took some losses on the miners earlier this year because I didn't listen to you and got in in a bear market. I know, I'm an idiot and I learned my lesson. Sometimes losing money is the best way to learn.

    I'll admit I'm a very rookie trader and I have learned a ton about trading from your site. I'm here only to learn!

    Bear market or not though, silver bullion for 19 an ounce right now is an insane deal, especially if you have a long term bearish perspective on the USD. I think most of us can agree on that, no matter if you are short term bearish or bullish.

    I trust that you'll definitely let us know when you believe the POG and miners have turned. Again, thanks a lot!

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    Replies
    1. Adam;

      I am glad that the site is helping you learn to read the markets. That is encouraging to me.

      Yes, I learned every single bit of my trading skills from LOSING MONEY. It is the BEST TEACHER provided you learn from the mistakes and do not repeat them.

      I have to wear two hats as a trader - one is more short term and the other is long term. long term accumulation of the precious metals makes sense at these levels because your downside is somewhat limited. In other words, the risk/reward is in your favor as a buyer of the physical metals, provided you have a long term perspective and are willing to sit on an asset that may not do anything much to the upside for a while yet.

      That is totally different than what I have to do as a trader. With the kind of leverage in the futures market that I deal with, I do not have the luxury of putting on losing positions against the main trend. If I did, you would no longer have "TRADER DAN" but instead would have FORMER TRADER DAN who lost all his money!

      I am trying to listen to the voice of the market like the rest of us here at the site and see what it is saying and when we may finally put a bottom in these precious metals.

      Very best of success to you in your trading endeavors! and I sincerely mean that!

      Delete
  11. I can imagine how tough it would be to be trading for a living in the current gold/silver market. But as you say, 2 hats and if one takes the longer view it does seem logical that gold is a bargain right now. Sure there are some who go on about bullion going lower but think that would be a very short lived blip IF it happens....my rationale is gold/silver producers are already stating that they're taking measures to reduce costs by cutting back on production, all simply because current prices are near or below their all-in production costs. These producers can't produce at a loss and will simply start moving into maintenance mode, don't you think Dan? Everything in our world comes down to supply & demand and if supply gets choked it stands to reason that demand will test price to the upside.
    I'm a little confused on what I've heard about outfits like JPM pulling a lot of physical gold out of GLD....is it really backed by physical or if we ever get a default will we find only the big boyz get the physical and the rest of ETF paper is settled for whatever $ they determine. Dan, can you enlighten us?

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    1. chuck;

      The cure for low prices is low prices. That is what shuts in production and eventually dries up the available supply. Demand then picks up and prices begin moving higher. It will be no different for gold than any other commodity in that sense.

      JP Morgan is standing as the large stopper for Comex deliveries. What they are doing with the gold is unknown to those of us outside of that firm. They obviously are buying and that is the reason that those who keep talking about the feds suppressing the gold price at these levels are confused.

      Morgan sells when the price is going higher; not when it is moving lower.

      About that gold in the ETF. Here is what is so perturbing about too many of these gold sites... first they poo-poo the notion that the physical gold is actually there to back the ETF claims. Then, when the reported holdings of gold are falling, they tell us that all this gold is flowing to the East.

      Yet they can glibly tell us this without even batting an eye over their logical inconsistently. Think about it - they claimed that the holdings of gold being reported by the gold ETF were not valid, that there was no proof that the gold actually existed. Now that the reported holdings are falling, they claim that the "non-existent, fraudulent gold that is not there" ( notice I am using sarcasm here) is being bought by the Asians.

      They say this without even batting an eye. Here is a simple question based on logic and consistency - How can gold that was supposedly never there going through the process of moving to Asia?

      don't expect an answer from them....

      No matter how they answer - they are going to have to admit that one of these two claims was scurrilous and that they were propagating misinformation.

      Both claims cannot be true....

      Delete
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