Weekly Gold Chart

I think the chart speaks for itself. Gold has managed to put in the worst WEEKLY CLOSE since July 2010, three and a half years ago.

The bounce today was feeble, considering the extent of the downdraft on Thursday. It did manage to close above $1200 but just barely. The fact that the HUI could not hold its gains on the day is alarming to me. I would have hoped that it could hold its bounce without attracting more selling.

Based on this, I would have to lean towards saying the gold market still looks heavy to me and could come under additional pressure next week. The one saving grace that it will have working in its favor is that the Bears have made a lot of money this year and might still be looking to cover some additional shorts and book those gains before the end of the year. That, plus the fact that rarely do traders pile on large positions heading into the end of the year; they generally tend to do the opposite. That might take some of the pressure off of the market, temporarily.

Bulls need some serious help very soon....

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.

US GDP increases faster than expected

US 3Q GDP was revised higher from its initial 3.6% increase to a surprising 4.1% increase. The Commerce Department stated that a revision in consumer spending was behind the higher number. The data sent stocks on a tear higher as they set yet another record high. All is well as far as investors are concerned especially if the consumer is spending money. Again, I am merely repeating what the sentiment is in the market right now.

Gold seemed to draw a bit of strength from the number. The thinking was that the Fed's rosier assessment of the economy coming out of the recent FOMC meeting was being confirmed. That led some traders into thinking that if the economy is growing at a faster clip, job hiring will begin to pick up. If that were to occur, there might be some modest pickup in inflation.

Also, Asian demand for gold was stirred last evening as bargain buyers stepped up to grab the metal near 6 month lows in price. Coming at the chart point that it is, technicians are closely watching to see if the critical support zone near $1180 can hold. Gold will have to regain the "12" handle and maintain it to convince bottom pickers that they can wade back into the water. That will buy the bulls a bit of a breather but until they can take price back above $1220 - $1225, rallies will be suspect.

Short covering and bottom picking were the features in gold in today's session. Some shorts are closing out their bets on lower prices and taking their profits with them as they leave for an extended Christmas break. Many will not return until after the start of the New Year. Next week promises to be one of volatility as liquidity begins drying up in earnest. Do not be surprised if we see some strange moves.

By the way, just to have some fun with the Flash Crashers - Gold shot up sharply near mid-morning as some sizeable buy orders entered. One trader quipped that " No LEGITIMATE BUYER would act in such a fashion".

It never seems to end does it? We are even back to backwardation talk once again... sigh.... let's just say it once again - gold will bottom when it is good and ready to bottom. Not a minute sooner and not a minute later. Traders just take the market as it is and attempt to deal with that rather than dealing with conjecture and speculative theories. When the market becomes concerned about something, it will be reflected in the price. Until then, it is just a huge waste of energy attempting to keep up with the latest sensation in the gold market. Honestly, I sometimes wonder if some of these guys have a life outside of the gold price.

I have stated it before but will do so again - Gold is insurance against currency debasement. One buys insurance to protect themselves against unforeseen events HOPING that they will never have to use it. One does not buy insurance and then OBSESS over the policy. You buy it, obtain your peace of mind and then get about with the business of life. Owning gold provides you with the peace of mind that if events unfold that are deleterious to the health of the US Dollar ( if you are an American citizen - obviously citizens of other countries would be focused on their own native currency) your assets are shielded as much as possible.

It does seem to me however that those who keep yearning, pining, hoping, wishing, and even perhaps praying, for a higher gold price are yearning, pining, hoping, wishing and even perhaps praying for the house to burn down so that they can collect on the insurance policy. I find that rather sad. I am interested as much as anyone else in honest money and am more than ever concerned over the mounting US mountain of unfunded liabilities. That is why I own gold but I really marvel that so many seem to almost welcome the chaos that would engulf our society should the price of gold indeed reach some of the levels that many of these prognosticators assure us it will reach. As a father with children, I do not wish to see a society that would more closely resemble something out of a "Mad Max" movie just so that I could bathe in all the Dollars that my $50,000 ounce gold bar would bring me. There is almost a morbid mentality that would wish for such things.

Back to the technical charts - With the S&P 500 making new highs, traders are confirming that money flows are continuing to move into equities as the "go to" investment sector of choice. Until something occurs to change this psyche, I still think gold is going to face some serious headwinds to any sort of SUSTAINED move higher. There will continue to be rallies as shorts book some profits and bottom pickers emerge but the intermediate and short term trend remains lower until proven otherwise. I understand that some of those in the gold community will swear, curse and rant at me for saying this ( Norcini has crossed over to the Dark Side), but the market is what it is and that means accepting it and dealing with it if one is to make money as a trader.

By the way, I am thinking of temporarily changing the name of this blog to "Darth Dan's Market Views" and posting a picture of Darth Vader below mine to show the former Trader Dan and then the transformation to the reviled Darth Dan. When gold finally does bottom and resumes a SUSTAINED uptrend, then I can change the name back to Trader Dan once again with Luke Skywalker having rescued me and turned me back to the correct side of the force.

The HUI is seeing a bit of a bounce today as some shorts cover and some bargain/value buyers move in to take advantage of low prices. That being said, considering that the broader equity markets are soaring into new heights, that this meager bounce is all that the mining shares can put in for right now is rather disappointing. Unless we can see some more concerted buying efforts in the mining sector next week, the HUI is on track for the worst MONTHLY CLOSE since May 2005. That is even lower than the monthly close that occurred during the depths of the credit crisis in 2008. Very depressing stuff indeed.

At least bellwether Barrick Gold remains above that chart gap posted last Tuesday ( Dec 10). While it is not that much, I am sure the beleaguered bulls will take all the consolation that they can find right now. Maybe we will see some guys step in here and buy the miners in anticipation of a short pop higher. Year end book squaring could bring about some selling as investors throw away losers for the year to offset some of the gains that they have made elsewhere in the equity world. Once that selling is finished up, there might be a reduction in willing sellers at these levels, especially as the end of the year draws nigh and traders avoid putting on any sizeable positions as they wait for the advent of the New Year to do so. We'll watch and see what develops.

One more time for emphasis - be prepared for all sorts of strange and inexplicable moves in many of our futures markets. Traders are squaring books for year end and are moving to the sidelines to take some time off. That sort of thing is going to result in some bizarre price swings. Day to day gyrations do not matter as much right now as the longer term trends.