Hedge Fund Short Covering in Gold is the Story

This story simply will not die as it keep happening - hedge funds continue to cover short positions to an extent far surpassing the amount of fresh, new buying that they are doing.

Last week they covered ( closed out) 4,675 short positions. This week they outdid themselves as they covered a whopping 5,248 shorts made up of both futures and option positions! On the long side, they actually reduced their exposure by some 482 contracts. It is too bad that we cannot see what occurred from Wednesday through Friday. My view is that today's strong rally through overhead chart resistance further cleaned out some more of their short positions in a big way.

Let's again put this in perspective - at the start of this year, the hedgies were sitting with a total of 72,571 outright short positions, futures and options combined. As of this past Tuesday, that number has shrunk to a mere 21,073 or a reduction of  51,498 shorts.

Over this same period, the number of outright longs has increased from 106,675 to its current number of 144,080, for an increase of 37,405 futures and options positions.

Again, the clear driver for gold this year has thus far been short covering as the dominant feature among the biggest specs on the planet.

My own personal view is that the hedge funds seem to be reluctant to get too aggressive on gold from the long side. Perhaps some do not trust a rally predicated on a geopolitical event. Either way, in looking at the chart, I am of the view that it will take a push through that spike high near $1425 to get them to really commit in size to the gold market. That is a big level to watch, if we can get there.

What I mean by that is where we need to see some critical chart resistance level give way in a very convincingly manner to convince the doubters and skeptics to come on into the water and get completely wet. There are still many who are content just dipping their toes in. Translation - we need to  see far more new, fresh buying outnumbering the number of shorts getting squeezed out.

You must have more than short covering to SUSTAIN A STRONG BULLISH TREND. As I have said before, all good bull moves begin with short covering but, and it is important to note and understand this, they cannot sustain themselves solely on buying by frustrated or nervous bears; they must have fresh blood.

There is an old saying among we traders - "A bull market requires fresh food every day to feed it". By that I mean one needs to give NEW REASONS for longs to get aggressive and remain brimming with confidence over their existing positions to where they are eager to add on and pyramid up. Short covering does not result in that. That merely provides a burst of fuel that drives the price higher but then fizzles out, sometimes as fast as it began. One has to see sustained waves of buying continue to come into a market to KEEP if defying gravity.

By the way, that certain web site that loves to plagiarize what it finds here, please note that we are watching you so if this shows up on your web site or any of your publications, without attribution to the source, it will be duly noted.

Here is a chart only of hedge fund activity at the Comex gold market. Look at that plunge in short positions. That is what happens when a geopolitical events catches some traders off guard. The damage inflicted can and will occur very quickly and without much, if any, warning, leaving a mad scramble to exit existing positions.

I find it very interesting to also note that once again, this week, these same hedge funds were busy plowing into the SHORT SIDE of the copper market in large size. They piled on 4,618 new shorts while simultaneously dumping 3,288 existing longs. They are now NET SHORT copper to the tune of nearly 10,500 contracts.
As was the same case as with last week, every major category of traders is NET SHORT in copper, with the exception of the Swap Dealers who are holding the entirety of the long side in this market. The small traders, the general public, are also short.

Copper managed to close a bit higher today but after plunging a massive $0.18/lb this week, a bit of a profit taking bounce to head into the weekend is not unexpected.

I therefore find it no coincidence that this week was marked by strong selling in the hedge fund community of the Silver market. A total of 1,939 new shorts were added while 414 longs were dumped. They are still net long the market but have evidently been more inclined to follow copper this week rather than gold. Silver, as always can never seem to quite make up its mind what kind of metal it wants to be on any given day, an industrial metal or a precious metal. Just flip a coin as you can pick either one with about as much success as you can in predicting mountain weather.

We have the market setups - now we wait to see how events in the Crimea will unfold over the weekend. Based on the late-in-the-day price action in gold and in the US equity markets, there remains a great deal of nervousness around.