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.

Ukraine Worries keep Pushing Gold Higher; Dollar Struggles further

In what has been a constant theme for this past week, conditions on the ground over in the Ukraine region have generated nervous safe-haven related buying in the gold market. With equities looking a bit wobbly, some investors are selling stocks and buying gold ( the reverse of what they had been doing for all of last year). Throw on top of the fact that the Dollar continues to be losing friends of late, and the path of least resistance for the yellow metal has been higher.

The strong finish to close out the week puts the market on really firm footing as we head into next week. The wild card, and the potential to be a big spoiler, is this weekend's referendum in the Crimea. If the votes goes as many expect ( with the region voting to become a part of the Russian Federation) and all hell does NOT break loose, there is a very good chance that gold will see a fairly substantial amount of selling come the reopening of trading Sunday evening here in the US ( Monday morning in Asia).

Geopolitical events, by their very nature, are incredibly volatile. As such, both buying and selling tied to these sorts of things is completely emotion driven. That means the losing side acts first and thinks later. All they know is that they are on the wrong side of a trade and their account balance is disappearing. So out they run. Volume tends to run quite high during such times.

What this means is very simple - you have a 50/50 chance of getting it right as a trader when dealing with geopolitical events. I personally will NEVER trade those odds. Why not just hit the casino and roll the dice because that is about the same set of odds. Traders deal with favorable probabilities based on technical analysis. If you want to test your luck, try picking up some out of the money put or call options depending on your perspective and roll the dice on those. At least you know what the extent of your losses is going in while leaving the upside open for some good profits if you happen to hit it right.

I do wonder however with all the hype about massed troops on the border, Western sanctions, deadlines, etc. whether or not the gold market has already factored in most of those expectations. If things disappoint in the sense that WWIII does not break loose, I would expect to see the selling show up. If the conditions worsen, then gold will move higher as it factors in another  and more dangerous scenario.

That is how markets work. They anticipate events ( that is why it is called a "FUTURES" market and not a PAST or a PRESENT market. If the events materialize within expectations, more often than not you get a case of "Buy the Rumor; Sell the Fact". If the events do not unfold as expected, then the reactions can be quite severe, either up or down depending on the particular turn of events and how it is being interpreted by players.

What I can say is that traders of both persuasions when it comes to gold ( bull or bear) had better have some very light and very fast trigger fingers come Sunday evening. They might just need them.

Here is the weekly chart for gold. This week's performance was a real doozy of a show put on by the bulls. I have included the note I put on this same chart earlier this week which stated that if they could close the week over the resistance zone noted, ( $1,350 - $1,355) they have a real shot at reaching psychological resistance at the $1,400 level. They did just that!

Again, the move has been predicated on fear/concerns over that situation in Ukraine ahead of this weekend's big vote so just be prepared because all of this could evaporate if the world does not end come Sunday evening. The obvious flip side - If tensions remain high, so too will the gold price remain supported.

Looking at the technical levels on the chart you can see a couple of things here - the first is that the ADX line is beginning to flatten out. That is suggesting that the sideways action ( on an intermediate term basis the market has merely been moving in a sideways range between $1180-1200 on the bottom and $1425 or so on the top) could be coming to an end and that the POTENTIAL ( please note the use of the word) exists for this broad consolidation pattern to be coming to an end being replaced by a trending move higher.

That spike high near and around the $1,425 level would need to be taken out to shift this particular indicator that I favor into a trending mode. If it were to do so, one could easily make the technical case that a move back up to retest the broken FORMERLY MAJOR SUPPORT near $1,525 is reachable.

The Dollar's action would of course be key to this as well for if it cannot stay above 79 on the USDX chart, I do not believe gold will fail at the $1425 level. Any weakness in the Dollar of that nature would send a lot of strong speculative inflows into gold and those should be enough to better that spike high.

Again, let's see how events unfold over the weekend.