Speculators Short Copper, Cover in Silver and in Gold

The weekly Commitment of Traders report is out, seeing that it is Friday afternoon, so we can now once again proceed with our entrails-reading and tea leaf-divining as we dissect the internals of some of these commodity futures markets.

I thought I would start with my favorite indicator market, namely copper. Here is the COT chart. It looks like it was a case of - for the Hedge Funds - "If you can't beat 'em, then join them". They finally abandoned the copper market on the long side and moved over to join the other Large Reportables camp on the net short side of the market this past week. Those of you who have been following the site will recall that I have been fascinated by this battle between titans over the fortunes of the red metal. The "large reportables" camp has been winning that war.

I should point out, however, that it does appear we had a big round of short covering among these speculators that took place on Wednesday and continued into today's session. Here is the Daily Chart.

As you can see, I made a pointer to the Wednesday bar; the day on which the FOMC released their statement and Janet Yellen gave her now infamous testimony. Copper put on some $.06 per pound since then. No doubt those who were short the metal were just as spooked and shell-shocked as anyone else when her testimony began getting considered and studied more closely. I suspect they ran strongly for the exits as many shorts did across the entirety of the commodity sector, especially on Thursday when "the Yellen" unleashed havoc on the commodity bears. ( I want to recall that scene in the Russell Crow movie, "Gladiator', at the beginning when the Roman army is fighting in Germania and Maximus tells his officer; 'at my signal, UNLEASH HELL").

I think the shorts all felt like the barbarian army after the Romans finished with them in that battle scene. I know I sure did in my feeder cattle positions. They had gone limit down the previous day and ended limit up on Thursday! Everyone was panicking trying to figure out what the hell was going on.

Silver experienced a round of significant short covering this week, much more of which continued on Thursday and Friday's sessions. The hedge funds underwent a HUGE SWING of some 11,000 contracts in favor of the buy side as they covered  9800 short contracts. They only added about 1450 contracts on the long side however. That probably changed Thursday and Friday however based on what I have been able to glean thus far from the open interest data and volume readings. Prior to those two days, hedge funds, who had been net short silver nearly 6000 contracts were now net long by some 5000 contracts! That did not take long did it?

I would suspect that what silver, and gold, have undergone this week, is pretty much indicative of what happened to many commodity market bears. They were forced out by index fund buying and by hedge fund short covering, which was unleashed by Janet Yellen.

Here is a look at the gold COT chart noting the positioning of the hedge funds on a net basis.

You can see that the Net Long positioning of the hedge funds shot up through Tuesday of this week. As it did, it is not hard to figure out what happened to the gold price - up it went. And remember - this is only through Tuesday and did not include that wild ride higher on Thursday. I cannot even imagine at this point how many speculative shorts were blindsided by Maximus Yellen.

There was a swing of about 15,300 contracts towards the net long side among the hedgies as they covered some 13,600 shorts and added some 1700 new longs. I should point out here something that I have commented on during previous rallies in gold over the last few months - If one is bullish, one does not want to see a market moving higher led by short covering. One should expect to see short covering but they also WANT TO SEE NEW BUYING. That means, in subsequent COT Reports, we are going to want to see the number of new longs, especially on the hedge front side of things, outnumbering the amount of short covering. If this is the case, it will augur for further strength in the metal. If however, and this is key, we do not see that development, I will be concerned about the staying power of this current rally.

It is way too soon to be declaring the bear market in gold is over, especially on the basis of a week's price action but especially with a move higher led mainly by short covering. Let's see what we get for the next week. Also, please keep in mind that weekly chart of gold I posted yesterday showing the rectangular boxes denoting the range trade that gold has been undergoing.

From a technical analysis standpoint, gold has been in a bear market since it broke down below $1530. It has now stopped going down but neither is it in a bull market. It is RANGE BOUND - pure and simple. It will have to break out above the top of the year long range near $1400 before one can make declarative statements that "the bear market in gold is over". That is someone talking their bias and not being objective.

We had the same sort of talk back when gold bounced off of the $1530 level the second time some while back. The same chatter was" the move lower in gold is over- expect it to go on and make new life time highs". We all know how that played out!  

What we can say, and say with a great deal of certainty, is that the recent leg lower in gold has been halted. The market has found support first near $1200 and now again at $1240 ( a higher low within the range as I pointed out yesterday). But it has not yet broken out on the charts. It can run as far as $1400 and still remain rangebound.

Please remember this when we start getting the predictions again and confident assertions. Just stay unbiased and objective, respect the price action for what it is, and go with the flow. Above all, KEEP YOUR EMOTIONS out of it.

One can always tell those whose trading/investing decisions are based on emotions and not objectivity because they will be the first to insult those whose technical view of the markets contradicts their positioning as well as the first to crow when the market moves in their favor.

Trading/investing is not about emotions - it is about remaining objective to the point of becoming almost cold-hearted. That takes years and years of exposure to learn.

Incidentally, one last thing for now, some of you very kindly have suggested I put some sort of "Donate" button on my site. I have opted not to use ads as I feel they clutter the site up anyway and detract from what I am trying to convey. I have long resisted putting anything up here for monetary purposes but I must admit that there are times when trying to keep posting interesting and hopefully useful articles and such does take its toll on me. I am first and foremost a trader and as such I must give my trading my full attention and efforts.

However, the website does take a lot of my time and I am finding that I spend more and more of it in front of the computer to the point where I am wondering if it is worthwhile for me to continue this. I do have another life besides that of a trader. I think every man should try to leave the world a bit of a better place than he or she found it but I also have a legacy to think of in regards to my own kids and wife.

Please send me a bit of feedback about this. I do not want to do anything that would come across as unseemly or blatantly or obscenely mercenary. I would rather however go with a Donate button rather than make this site, fee paid or clutter it all up with ads.

Going the ad routine tempts people into surrendering their objectivity to cater to a particular set of the population ( call them "the choir") and moving towards sensationalism and other efforts that are designed to attract as much viewership as possible to generate more ad revenue. I abhor that personally. I would much rather have a clean conscience and a much less visited web site than one that makes lots of money but ends up harming people because it clouds their objectivity and keeps them in poor investments by marrying them to one point of view only. That is a dangerous and financially destructive path.

Going to a fee paid site might prevent some of those who cannot afford such things from reading the site and maybe learning something that might help them become better investors or traders.

The Donate route seems to me to be a good alternative as it is completely voluntary and not tied in whatsoever to the amount of website clicks that many use to generate revenue.

Let me hear from you on this please.

To those of you who have been reading here regularly, thank you for your continued patronage. I want you to know that I am honored and humbled by your viewership and that I take very seriously what I am writing and my analysis because I realize I have earned the trust of many of you. That trust cannot be valued too highly. The last thing I would ever want to do is to do anything that might be misconstrued as being dishonest or disingenuous. I try to call things as I see them - sometimes I am wrong - sometimes I am right but I do try to stay objective. Hopefully that has been conveyed over the years here.

Again, thanks.
Dan