Some thoughts on the Gold Commitment of Traders

For gold bulls, this past week was rather traumatic to say the least. The near two month long support region centered at the $1280 level gave way resulting in a drop of an additional $40. The combination of reduced tensions in the Ukraine, some improvement in key economic data ( although the situation remains mixed ) and tame inflation, along with a soaring stock market, has resulted in Western investors selling gold and moving the funds into equities in order to gain the best possible return on investment capital.

Gold now enters a seasonally weak period during the month of June so additional losses are certainly possible as we move forward into that month. It looks as if there was some late-in-the-session short covering by bears in the miners this afternoon as they rang the register on a very profitable month.

To give you an idea of how successful they were - the HUI started the month of May at the 225 level and moved all the way down to 201 today before the slight bounce to end the month closing at 206.

The GDXJ, fared a bit better ( because it has suffered even more severe losses over the last couple of years than the larger caps) as is started the month at 36.50 and fell to 32.43 ( almost entirely erasing this year's gains) before it closed at 34.

Next Monday brings the start of a new trading month so it will be interesting to see how players position themselves the first entire trading week since the Memorial Day holiday shortened week.

For gold the technical damage done this week was severe. However, based on this afternoon's Commitment of Traders report ( which unfortunately did not include the $20 drop over the last three days of this week) the entire group of speculators, every category, still, in spite of the deteriorating chart pattern, remain net long.  That concerned me last week and it concerns me still this week.

They are still not getting out meaning that their losses are continuing to grow. At least in silver they have finally figured out which side of the market to be on ( short ) and might perhaps be making some money for a change, but when it comes to gold, it seems old habits die hard.

What I wanted to do was to graph out in visual form something showing the reader what the problem is for the longs in this market at the moment.

Take a look at the following chart which has as its beginning point, the middle of December last year. As you can tell, the gold price, which is on the right axis of the chart, was near $1200 then ( closing price). It climbed all the way to near $1381 on Ukraine fears before plummeting back to earth where it currently sits as of the close today slightly below $1250.

The blue line on the chart is the SUM TOTAL of all three categories of SPECULATORS LONG positions only. I am not noting any short positions or the NET position but rather just the Long positions.

If you note the second and third vertical lines in mid-April, you can see that there was a large influx of speculative buying. A great portion of this was related to safe haven flows tied to Ukraine fears. That buying was met with heavy selling by both the Commercial interests ( possibly some hedging by some miners) as well as Swap Dealers. There was also some selling in the large speculative categories as well by that was outnumbered by their buying. Some of the old pros and those with past experience knew that selling gold into geopolitical fears was the proper way to approach the metal as those rallies tend to be fleeting as a general rule.

Nearly all of those brand new longs, put on over a three week period or so, were put on when gold was trading between $1300 and $1290. As the crisis in Ukraine seemed to cool down, disenchanted bulls began giving up as can be seen by the fall off in their numbers early this month. About half of them threw in the towel (look at the horizontal line). That translates to another 9,000 or so that were left and whom did not get out which had paid north of $1290 for their gold. We do not have all of the movement among traders for the last three days of this week unfortunately but suffice it to say, a fall below $1280 was not good from a technical standpoint but from an account management standpoint, a further fall to $1260 and then to $1240 means some very severe losses for that crowd that purchased their gold above $1290 and on towards $1300. One has to wonder how deeply capitalized some of these guys are because included in this number of total speculative long positions is the little spec, the most undercapitalized trader of them all.

It is interesting also to note, ( go back to the first vertical line in early February, that almost all of the longs that bought into gold when it was first near $1260 and then carried towards $1380 are now gone from the market. However some of them still remain ( about 6000 or so). Those 6,000 put on long positions when gold was near the $1260 level so they too are now underwater completely. Their paper losses are not that severe  - yet. The question is at what level will their losses be sufficient to force them to exit?

What I am getting at is the fact that we currently have a still sizeable contingent of speculators on the long side of the market who are underwater on those long positions - if they did not yet exit Wednesday, Thursday and Friday of this week. We have no way of knowing that for sure until next Friday. My guess is however, that some of them did liquidate, either by choice or were forced out by margin calls.

Go back to the beginning of the chart  - As you further see from the chart, there still is a large number of these specs who moved onto the long side back when gold was near $1200 and who then added on more as gold climbed above $1250 in January. So far, those positions are safe, which is the reason for this continued bullishness among the specs when it comes to gold, unlike silver which is losing favor among them.

In going over this chart, I believe gold will need to fall BELOW $1240 to kick some of this crowd out with more coming out if gold falls through $1215.

If this does happen I would expect to certainly see the speculative side of this market also begin to ramp up NEW SHORT positions at the same time. That would bring us selling from two directions - long liquidation and fresh shorting.

 Perhaps we might see a true, lasting, bottom if that were to finally occur. In spite of what many seem to be saying, sentiment towards gold, while it has taken a big hit, remains, based on the still sizeable number of these speculators who are long at the Comex gold market, bullish. That is quite astonishing but at least we know some of the reason why. Many of them are into gold at much lower levels and still have their positions in the black. They do not need to exit as of yet. Just look at that blue line however and see where it stands today compared to where it stood at the middle of December last year. There remains enough specs on the long side to pressure this market lower if those key technical support levels do not hold and they are forced to abandon ship.

Gold bulls certainly do have their work cut out for them. As always, we will watch the price action and let it be our guide.