“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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Saturday, March 15, 2014

Gold Price vs Hedge Fund Activity

It took a bit of doing but I have been able to create a chart of the price of gold overlaid against the activity of the big hedge funds based on the Commitment of Traders report.

I present it here for your reading convenience. The blue line is the number of OUTRIGHT LONG positions among this group of traders. The black line is the number of OUTRIGHT SHORT positions. The area chart ( in green) is based on the CLOSING PRICE of gold for the week ( please note that this is not a daily chart).



Notice the near perfect symmetry of the green area chart ( the gold price at the Comex) with the blue line. This is why I keep stating that the big speculators ( hedge funds) are the drivers of our modern markets. You can see the price of gold has tended to rise and fall with that blue line until early in 2013.

About that time, the number of short positions by the hedge funds because to increase as this category of traders became increasingly bearish. The wholesale long liquidation halted at that time as well. From that point forward, the blue line is relatively flat.

However the gold price continued to fall. Why was that? Answer - because the hedge funds began to play gold more from the short side as they ramped up the number of outright short positions to its largest point in over a decade. That selling took the price of gold down below $1200 at one point ( remember this is a weekly closing price).



In July of 2013 an enormous short covering rally took the price of gold up over $200 from off the low. Can you see the sharp fall in the BLACK LINE and the corresponding rise in the green area?

Then look at what happened - the price of gold began to fall again but this time around it was mainly due to hedge fund long liquidation ( see the sharp drop in the blue line). Shorts were covering into that long liquidation and that is why the black line moved lower along side of the gold price.

Then in November of last year, the hedge funds began aggressively shorting gold again ( the black line rises sharply)  with the result that the price dropped well over $150 into the end of the year.



Now look at what has happened this year... look at that black line and see it plummet. Look also at the blue line and see it jump. Hedge funds are both covering shorts aggressively while some in that same category are rebuilding longs. The result has been to push the gold price up nearly $200 once again.

Please note that this has everything to do with money flows ( money flowing into and out of gold) and nothing to do with price manipulation theories. When specs are buying, the price rises. It does not matter whether the buying is coming from short covering or from new buying - the price will rise.( The longevity of that price rise is however dependent on the nature of that buying - but that is a different topic ).

When specs are selling, the price will fall.

What you see reflected in these two lines, the black one and the blue one, is a visual graph of INVESTOR SENTIMENT towards gold. It really is that simple. Tell me what the sentiment is towards gold, and I will tell you what the price is going to do. Why do you think we spend so much time attempting to discern the shifts in sentiment and what is driving prices?

Notice I am using the words "INVESTOR SENTIMENT". By that I mean Western investment demand, not Asian physical buying. The latter merely bottoms the gold price; it does not drive it strongly higher. That is reserved for investment demand coming from the West.

Incidentally, this is what technical analysis and study of the charts does for us - it provides a glimpse into changing sentiment. Learn to read the charts, and you will learn to gauge sentiment. You do not need to waste your money and enrich others by paying for their high-priced newsletters and putting up with their wild predictions. In my mind, too many of these hucksters cannot make a living trading so they rely on you, their carbon-based, warm-blooded hosts,  to feed them and provide them with a stream of steady income. Save your money, force these human ticks to trade to earn their own living, and do your own analysis and your own thinking.

I can tell you one thing with absolute certainty - if the majority of these overpriced newsletter hustlers had to actually trade to produce an income, you would see a huge reduction in the number of wild prognostications, sensational claims, goofball theories ( backwardation claptrap always comes to my mind), and other assorted reasons for you to rush blindly into a market without having the foggiest idea of why you are putting YOUR HARD-EARNED WEALTH at risk based on the theory of someone else whom you do not know and who will still make money even if they are wrong. You, on the other hand, are the one who stands to lose. Remember that....

 

36 comments:

  1. Does anyone know what time the Crimean vote is tomorrow? All I can find online is the 16th, but no specific time.

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    1. No idea.
      It's not Crimea that is most important imho, rather the Eastern Provinces of Ukraine.
      The strategy of Russia seems to be :
      1) secure whole Crimea, thus cutting Ukraine's access to the sea. Ukraine is suddenly economically strangled. It is easy to economically blockade Ukraine if you control all the ports. At least you isolate them.
      2) Independance vote in Crimea will probably push some eastern Ukraine provinces to ask for a referendum as well. There will be violent protests in those provinces where Russians are significant but close to 50/50. But Russia may use as an excuse this violence to intervene militarily and "protect" russian civilians.

      Once Russia really invades (you think they are training now against the snails?) eastern Ukraine provinces, then IF the reaction of the West is to integrate Western Ukraine into NATO and send troops to Kiev...we'll have a nice face to face mess.
      Anyway, it's already a mess now.
      The dominos as slowing cascading one after the other.
      Let's hope Russia doesn't set a foot in eastern Ukraine, but tactically, that wouldn't make sense. If Crimea is too close from Moscow to their eyes, then surely Eastern Ukraine is too close as well.

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  2. Dan,

    I don't doubt your expertise in trading, nor your ability to interpret charts, but it strikes me that there is a rather large problem with your assertion that gold price movements are solely the result of investor sentiment. The problem is that "investors", and certainly the professional traders who represent them, will almost invariably execute orders in a manner that serves their own best interests. And the the evidence is overwhelmingly clear that at the flashpoint of many sharp declines in the gold price over the past couple of years, there were huge numbers of contracts executed at precisely the least liquid (i.e. least appropriate) times.

    There are, of course, countless analogies that could be made, but I'll use this one: If I owned all six examples of a particularly rare vintage Ferrari, and decided that I wanted to sell them, it would be ludicrous to put them on the market all at once, as that would degrade their value significantly.

    No one who is actually intent on receiving the best return for their gold (or related contract) would dump a large amount during the most illiquid trading hours. How, then, is such behavior not manipulation?

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    1. Paul;

      Every single trader, once they put a position on in the market, wants the price to move in their favor. That is not an unusual desire. As a matter of fact, it is the ESSENCE of making a profitable return.

      The nature of today's markets has made influencing others much easier than it was in the past, in my view, because in the past much of the trading community relied upon discretion. in other words, they THOUGHT first. Nowadays, the trading world is inundated with SYSTEM Traders. That is another way of saying those who rely SOLELY upon price movement to influence their trading decisions rather than upon FIRST a fundamental view and then SECOND, a technical analysis signal that confirms a fundamental view.

      Today, most hedge funds could not tell you the difference between a butt cut or a picnic cut or a primal or a chuck. Neither can they tell you what the word, milking stage means. They don't care.. they rely solely on price movements to exit and enter trades.

      Seeing that this is the case, if one can move a market far enough to influence price ( by running stops) one can get the computers of the world to all fire at the same time and guess what - price then moves in your favor.

      If you want to call manipulation, that is okay with me but, and this is important, it is the NATURE OF EVERY SINGLE MARKET that trades on this planet involving hedge funds. I see it over and over and over again, in soybeans, cattle, hogs, corn, wheat, coffee, etc. Those who keep yapping about "flash crashes" as if that is some sort of unique evidence that nefarious, evil forces are intent on crushing gold every single time it dares to raise its head are simply ignorant of the nature of today's modern futures markets.

      Look, if this were simply something that only occurred in gold, I would be the first to note it as subscribe to that theory. The simple truth is Paul, that it is not.

      I have been sitting in front of this damned computer screen of mine for many, many years, watching prices move in many different commodities at every hour of the day you can think of and I assure you, these guys who keep barking about Flash Crashes are ignorant of what happens outside of the world of their beloved metal.

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    2. Dan, not only does it happen in other markets, but for some reason gold charlatans *always* ignore the upside moves... like the sharp upward spikes that happened almost every day this week.

      "No one who is actually intent on receiving the best return for their money would buy a large amount during the most illiquid trading hours"

      achem...

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    3. Dan –

      I appreciate the thoughtful response, and understand your point. It remains difficult, however, to understand how the initial (downward) momentum could be built up unless there were clear intent to drive the price significantly lower. So, yes, I'd call it manipulation. Now, who is manipulating, and why, are separate questions.

      If your argument is that when gold drops significantly during the quietest trading hours, it is the work of clever traders who represent short interests, and that they are simply taking advantage of the (momentum-based, hedge fund driven system), I could see that as being a plausible explanation for at least some of the spikes. But given the sheer size of some of the trades in question, coupled with the vested interest and firepower that certain other BIG players have, it's difficult for me to imagine that such declines are always due solely to the dynamic that you suggest.

      KD –

      There are plenty of skeptics, myself included, who don't ignore price spikes. However, over the past two years in particular, the characteristics of sharp downward spikes have been far more suspicious than those of upward movements in price.

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    4. Paul;

      try looking at the bigger picture and viewing the gold market NOT IN ISOLATION from the other important key markets. By those, I mean the overall direction of the commodity sector taken as a whole, the Yield on the Ten Year Treasury, the VIX, and the Dollar to cite some.

      Those who keep blathering on endlessly about this flash crash and that flash crash never seem to bother ( it requires the expenditure of a lot of time and dedication to understanding correlations between the markets) to view what is happening in the commodity sector as a whole, the VIX, the Dollar, the equity markets and the currency markets.

      I can only try to explain to you what I have observed for many, many years now. If you want to believe the infantile theory that every time a large order hits gold, it is another example of the feds manipulating the gold market to drive it lower, I honestly cannot help you.

      Gold does not trade in isolation from other markets... keep that in mind and a lot of the mystery about it will evaporate and it will be much easier to understand without having to resort to the simplistic notion that "Gold goes up - Good"; " Gold goes down - BAD".

      How is this one for you... Soybeans get jammed higher - Good - Soybeans go down - Bad...

      How about this one: " Wheat prices jump sharply higher overnight - BAD; " Wheat prices sell off overnight - Good".

      Come on already Paul... markets are much more complex as far as their relationships with other markets than the puerile notion that gold getting hit with large orders to sell is proof of evildoers at work.

      This stuff keeps people blinded to the unity of money flows and why things are doing what they are doing.

      One last thing - you mentioned "Over the last two years... sharp downward spikes".

      Do yourself a favor (I Have posted this stuff over and over and over again here) go back through the postings here or better yet, pull up a chart of the CRB index, the Goldman Sachs Commodity Index, the Dow Jones Commodity index, or any commodity index you want and tell me, and be objective, were commodity prices as a whole moving lower or where they moving higher?

      Then pull up a chart of the US Dollar and do the same. Then pull up a chart of the VIX and do the same, and lastly pull up a chart of the yield on the Ten Year. If you really want to go the extra mile, pull up a chart of the S&P 500.

      If you do so, and if you are open-minded and understand the connection between asset sectors, interest rates, fear/lack of fear, interest rates, etc. you will see very easily that there was NO NEED to attack gold if you were the feds because once it broke down below $1530, the entire commodity world was moving lower alongside of it. The VIX was flatlining and equities were soaring. Where do you think money was going?

      I can tell you where it was NOT going and that was into gold or commodities in general. It was going into equities and chasing big returns.

      Like I said, all I can do is point you in the right direction my friend. You have to decide for yourself what you believe. You know what my view is. That is not going to change.

      Thanks for the comments/

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    5. Kid Dynamite;

      Very well said - manipulation of gold only occurs when the price is moving lower. that is because it is an absolute truth of the universe, that GOLD MUST ALWAYS RISE IN PRICE. sort of like the idea that the sun must always rise in the East. If it does not, something evil is at work.

      About that gold chart with the net positions.. I will try to get that... have that already set up on a COT chart where I Have the net positions of all the players posted but I wanted to show the outright shorts and longs so as to give the inside the market look at the amount of short covering versus new buying. That is hard to decipher from just using the net position. Let me see if I have some time later this weekend and I will try to get to that...
      thanks for the comments

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    6. Dan - I am working on building this chart right now. if you give me your email address, i will send it to you when I finish it.
      -KD

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    8. Dan -
      here are those charts I was asking you about - I made them myself:

      http://kiddynamitesworld.com/drives-price-gold/

      best,
      KD

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    9. Kid Dynamite;

      Nicely done - very detailed work and a terrific visual...

      Thanks!
      Dan

      Delete
  3. Dan, if you wrote a book on trading I would buy several copies. Have you ever put out a book on trading or thought of doing one? I have considered taking much of the free advice you have written in this blog and condensing it into a file but don't have the time. Anyway, the wisdom you put out on this game is priceless imo.

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    1. Bob;

      thanks so much for those kind words.

      Yes, I am seriously beginning to consider doing just that. I have to try to find the time however...I would take some of the things I have written here and develop those concepts much further. Plus I could rely some personal experiences where I made major screw ups and show folks hopefully how to avoid doing that in the future.

      I sincerely appreciate and am humbled by your comments.

      Delete
    2. You are most welcome Dan. Another consideration that would hopefully attract subscribership would be a fee based trading service preferably in real-time. Sign me up.

      Delete
    3. I'd buy one for sure, too.
      That would be the...second one in ten years about trading :)

      Delete
  4. Thanks for taking the time to make those great figures.

    You write:

    "Notice I am using the words "INVESTOR SENTIMENT". By that I mean Western investment demand, not Asian physical buying. The latter merely bottoms the gold price; it does not drive it strongly higher. That is reserved for investment demand coming from the West."

    Could you offer some insight on why this is the case? Is it perhaps because Asian buyers don't use leverage? Do you think that could change? Also, do you think this is a good thing (morally-speaking, I guess) -- Ted Butler recently penned a column where he says the COMEX is basically pure evil and criminality, and should be shut down.

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    1. GM Jenkins;

      When gold was in a bull market, from 2001 until it fell below $1530-$1525, every single sell off in the market was halted by Asian demand for the metal. That demand is price sensitive. In other words, the Asians actually believe in the old adage of BUY low and SELL High.

      Hedge funds on the other hand buy HIGH and keep buying HIGHER until the momentum stops and then they sell and sell lower until the downside momentum stops. In other words, they chase price higher or lower.

      Asian demand tends to fall off when the price rises too quickly as those are physical market buyers and a soaring price tends to spook would be buyers over there.

      That is simply a matter of record and is based off of what we have observed since 2001. I am not saying it cannot change ( especially in the event of a panic) but the pattern is the one I have just noted.

      Yes, the Asian buyers are buying the physical metal and are not leveraging it up as the WEstern based hedge funds do with the paper gold venues, such as GLD or the futures.

      Butler is a broken alarm clock who is stuck on the Comex is corrupt thing and will be until the cows come home. I used to have major issues with him years ago because every single time we got a big build in hedge fund long positions, he would start screaming about a big selloff coming and scare the heck out of everyone. They would then sell, only to watch the price rebound after the retracement in price would occur. I do not know what he does for a living but if it is trading, I would think he would be quite impoverished by now.

      Trading is a difficult profession because it requires one to balance their own views with that of the market and learn to accept that many times, both views are mutually exclusive of each other. That means, having to swallow your pride and just say, " I was wrong in a big way". That is just life but some folks cannot admit it and move on.

      You have to feel sorry for them because they never learn. Shock a cow with a cattle prod a few times and even the dumb brute gets it after a while. Some folks seem to love the cattle prod...

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    3. As a former T Butler newsletter subscriber I can recall that he made a considerable sum of money in 2010/11 when Silver started its incredible run in that time-frame. He made so much in fact that it made up for several out of the money silver option positions that he had in play for decades since the mid eighties according to him that he just kept rolling over. I am sure he is probably back to square considering the last 3 years. IMO he provides NO wealth generating advice as I cut him loose a few years ago.

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  5. i think the manipulation theorists would counter that the real large hedge funds are run by govt proxies, hence yes the hedgies do contril most the price action but at the behest of the govt.

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    1. Black Swan - yes, that is exactly what they love to come up.. unfortunately for them, it is even easier to debunk that BS than the Flash Crash theories. If the hedge funds are in reality controlling the price of gold for the govt, then how come the hedge funds move to the long side? Hmmm.... oh, wait a minute - it is only CERTAIN hedge funds - those are the evil ones and they are the ones shorting. The "good' hedge funds are on our side and they buy gold...

      Do you not see how ridiculous these guys look?

      I try to keep it simple - when the hedgies are buying ; price rises. When the hedgies are selling, price falls. That is pretty easy isn't it? Why do you think I just spent nearly an hour of my spare time constructing a chart to PROVE this?

      Delete
  6. First thanks for the graphical display. Powerful, and the historical picture says more than a thousand words could. Are the Comex numbers available in form where they can be copied and are available to all?
    Second question and maybe I am showing ignorance, but the Treasury Bond liquidation you portrayed the other day was unbelievable. Truly scary. If that continues in earnest, the world will be changing and quickly. When and where on the Fed site is that displayed. I got the latest basen report and no slowdown in sight. Very close to 4 trillion now. The additional needed to cover these treasury bond sales will prove difficult at best if liquidation picks up. Thanks for another fishing lesson Dan.

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    1. White Wolf;

      Pan fried Trout!

      I am a bit unclear as to what you are referring to when you are asking about the Comex numbers? are you referring to the positioning of the hedge funds? If so, that info is available over at the CFTC web site.

      yes, that Treasury liquidation is indeed a big deal as it is the largest I have on record for such a short period. I really do believe it is the reason behind the drop in the Dollar or better, the lack of safe haven buying that we would normally expect to see coming into the greenback during a geopolitical event. I want to keep a close eye on it because it could have major ramifications for the Dollar in the next few weeks.

      that data can be found over at the fed web site
      http://www.federalreserve.gov/econresdata/statisticsdata.htm

      under factors affecting reserve balances.

      Hope this helps buddy....

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  7. Dan -
    terrific post: one I've been thinking about writing myself.

    One thing: your graph shows longs/shorts separately... I think if you redo the graph with the net hedge fund position, the correlation will be shown even clearer....

    can you add that chart? net hedge fund positioning vs the price of gold...

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    1. Kid,
      You should consider these charts are free! It is clear enough to make his point..

      Delete
  8. Hope I'm not poluting the line, but this is in english, from a russian analyst.
    http://pozneronline.ru/2014/03/7181/

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  9. nice post , thanks for your charts.
    another way of saying: many HF are trend followers, esp global/macro.
    Gold been a key 'long' this yr after being a key 'short' most of '13.
    it's not politics or conspiracy, but performance trends. $$$

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    1. soonerstocks;

      Precisely! excellent observation.. it is all about obtaining yield or return on money invested. Funds go to where the action is.....

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  10. DAN - is this trading pattern with the hedge funds similar to how gold was trading when it hovered between 1530ish and 1800ish from 2011 to 2013?
    (sorry I wasn't a reader back then)



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    1. Elijah;

      Before I answer that ( it will take a bit of digging through mydata and charting it out) are you thinking more along the lines of the broad sideways pattern when $1800 was the top and $1530 or so was the bottom and the price worked within that range for that period?

      I think I know what you are getting at but want to make sure before I try to chart it out...

      Thanks buddy.
      Dan

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  11. Thanks Dan. You provide the most useful blogs regarding gold that I can find anywhere.

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  12. Dan, the gold crybabies with their Gato, backwardation, manipulation and naked shorting claims do nothing but show their ignorance as to how these mkts work. If, in the illiquid and quiet times, if the goddamn gold was any good, why don't the kwn crowd and jim willie and I could go on and on, why don't they attack and load up? Because they are born losers, that is why. Gold is gold and nothing more and nothing less. Sure, the mkts are dirty and manipulated and that is always how it has been; only to what degree does it change. So all you Hoosiers, quit wasting everyone's time and if you do not like it, take your balls and bats home and go play jacks in the backyard. Come on and grow up. Sparks, of course

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  14. It wonder how much everything would sell for from my mom's collection of jewelry. It would be fun to see how much we could make. Gold is going for a lot of money. http://www.wmje.com/

    ReplyDelete

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