Gold - Commitment of Traders

Hedgies continue selling across the gold market ( at least they did before Wednesday this week - after that they were doing some short covering). In a near repeat of last week's behavior, they did not liquidate all that many existing long positions. They continue to gradually rid themselves of those, which is a bit surprising to me. What they are doing is adding more short positions as they maneuver to play gold from the short side.

I want to emphasize that for all this, this group still remains net long the gold market and has been since the inception of this particular reporting data going back to the summer of 2006. One thing to point out however, is that their overall net long position is the smallest since January 2007. Translation - hedge funds have not been this bearish on the prospects for gold in nearly SEVEN YEARS!

One could perhaps make a contrarian argument based on that fact but even contrarian arguments need a fundamental spark to turn sentiment. Unless sentiment towards gold changes for some reason, these specs will continue to sell the metal into rallies as they play more for the gains in equities that can be had versus tying up investor capital in an asset that is not throwing off any gains whatsoever right now.

Here is the overall COT Chart. Note the area within the ellipse.

Once again we see a continuation of the recent trend of overall net buying by the Commercials who have decidedly moved into a net long exposure to the gold market.

Swap Dealers are also buying on a net basis as they continue to reduce their overall net short position but they remain rather sizeable on the short side of the market. My thinking on this is that some of them are working hedges against custom made contracts for some mining company hedges.

The interesting thing is the little guys or small specs. They are net long, but ever so slightly! this report shows them with a combined futures and option position of 16 contracts on the net long basis! The last time they were actually net short this market was back during the same time frame that the spike low at $1180 occurred this past summer.

So what do we have? Speculators overall remain net long the gold market but continue to abandon the metal in favor of stocks. The Producer/User/Merchant/Processor category is now net long with Swap dealers still net short. Basically the short interest in the market is being held by this group.

After this week's wild gyrations and theatrics, there no doubt have been some consequential changes in the composition of the various groups of traders. I have my suspicions as to what took place but that is just an informed guess on my part. We will need to see next week's data for a better look inside this market.

Unlike some others who seem more obsessed with what the Commercial category is going, I am frankly far more interested in what the SPECULATORS are doing. They drive markets, not commercials. The fact that they are still net long overall concerns me in the sense that while bullishness towards gold is certainly on the wane, we have not yet seen a DISGUST with the metal that tends to make capitulation phases. Too many speak of capitulation in gold. How can that be when speculators remain as NET LONGS???

It may not seem probable right now, given the backdrop of massive QE, but I wonder whether or not we will actually see the hedge fund category move to a net short position in gold as they did in silver. I certainly hope not as a long term proponent of honest money but I rule out nothing in this environment.

Sentiment in regards to inflation fears/confidence in the Dollar must shift for gold to attract eager Western-based buying. Also we need to see Velocity of Money to increase and wages begin to actually rise instead of remaining stagnant. I am not sure that one or even two payrolls reports are going to get that for us.

I think we will see when Western-based demand for gold resurfaces when/if the reported gold holdings in those gold ETF's stop declining and start rising.

Silver Commitment of Traders

By request:

If you want to know why silver prices have gone nowhere lately, take one look at the chart and more specifically, the outlined ( IN YELLOW )  ellipse on the chart. That is the hedge funds' NET POSITION. They now have the largest net short position in the history of this particular disaggregated report.

These big and powerful speculators are what drive our markets and they continue to sell rallies in Silver. Either they are going to have to be forced out by some concerted buying or the path of least resistance in silver is lower.

My thinking is that it will take a definite shift in sentiment away from the current "economic growth is steady but slow" sentiment towards one of "economic growth is picking up speed and is increasing" in order to run these hedge funds out of their profitable short positions.

From a technical standpoint, that means we need to see an upside violation of some key overhead chart resistance levels. My studies would indicate that this region which will begin to provide a bit of discomfort to the funds will begin just above the $21 level and extend towards $21.25. If the bulls can take prices up to those levels, and NOT FALTER, they will spark some serious short covering.

Until then, rallies will continue to be sold.

Late Session Selling coming back into Gold

Both gold and silver have seen the return of sellers late in the session as the vigorous buying that marked the early part of the session has seemed to have runs its course for now. This is occurring while the mining shares are surrendering some of their gains. There still remains about an hour or so of trading in the equities before the bell rings so there is time for a last minute surge of short covering/fresh buying, but what started off looking like a very strong day in the mining sector appears to be fading. We'll see what happens on the close.

As far as the metals go, the short covering that took place earlier today was nearly identical to what we experienced on Wednesday this week. In both cases price had dropped down to the $1210 level where it uncovered very strong buying. That reinforced this level as important chart support but what it also did was force some of the bears to once again cover after they sold the rally. The resultant short covering brought in some fresh bottom picking which scooted the market sharply higher but then the bulls disappeared.

This leaves us with the downtrend still intact but with bears probably getting a bit nervous about just how much downside remains in the market.

The gold shares MUST CONFIRM a bottom is in this market before I will feel comfortable that the worst is over for gold. If the shares cannot move higher, there is a good chance that bears are going to attempt another retest of that $1210 level once again. That level is now HUGELY important from a technical analysis standpoint.

Silver could not regain the $20 level. It still remains a teenager. Price action in there is disappointing to say the least.

It is going to be interesting to see the Asian response to all these theatrics come Sunday evening.

Gold Ricochets off of $1210

Earlier this week gold scored a low near $1210 before violently reversing on an "out of nowhere" short covering rally. Today, the initial reaction of the metal after the payrolls number was to plunge right back down towards $1210 again. However, it then staged another violent reversal higher on very strong volume. This action has gotten my attention.

As a general rule of trading - a market that fails to move lower AND STAY LOWER on what is considered bearish news is a market that odds favor having bottomed - at least temporarily. Again, with so many computers running our markets nowadays, one has to be careful with generalizations but this sort of price action is noteworthy nonetheless.

Another interesting thing - the mining shares are also moving higher along with the broader equity market this morning. They are not up by much but they are certainly not going down for a change.

Yet another thing - the Japanese Yen is also sharply lower. That currency has tended to be a reflection of trader sentiments towards risk at times. During times of risk aversion; check that - during times in which traders are fearful of SLOWING ECONOMIC GROWTH - the Yen has been the recipient of strong money flows. The Yen is now moving lower.

Another thing - Copper is moving higher.

Another thing - the VIX just collapsed lower today with the index thus far down some 8% as I type this. The fear/concern/worry from earlier this week apparently just evaporated.

Could it be that there are some incipient signs that the market sentiment is shifting towards one in which it really does believe that the economy is actually improving enough to see some actual stronger growth? The case is not yet clear. What is fogging it for me is the price action in the long end of theTreasury market. Were it not for that today, I would nod in the affirmative to the question I just posed; however, interest rates are moving lower  ( not by much but they are lower) in today's session. That does not quite fit in with an increasing rate of growth sentiment.

Putting in a temporary bottom does not necessarily also mean and uptrend is about to resume. Just take one look at the corn market as a recent example. It stopped moving lower, temporarily, but has not been able to develop any sort of lasting move higher.

One thing I do know - gold has been an easy one way bet as far as a trade goes for some time now. Short rallies and make money as the price drops. The easy money might be over, at least for now... let's see how this thing closes today before getting too dogmatic however.

By the way, JP Morgan continues to be the large stopper for December gold during its delivery period. They are gobbling up all the issues.

One other item to note - silver is lagging gold today. That is not what one would expect to see if the "improving economy" theme was becoming much more widespread. Lots of variables to consider as traders.

It is really unfortunate that the Commitment of Traders report due out later today will not include the price action from Wednesday and from today. Both days experienced these violent reversals. I would love to get a bit of a better look inside the market but sadly we will not get that until next week. By then it is too late to do us any good. This report really needs to be more timely but under the current setup the CFTC simply does not possess the financial resources/wherewithal to be able to generate something that up to date. Also, the brokerage firms do not have the manpower either to keep their reports to the CFTC that timely also.

I will get something up later on today after the dust settles. We can take a look at the closes and go from there.

Reversal Day

Yesterday was "Buy Commodities" Day. Today seemed to be "Throw Commodities Away" Day. Just goes to show the day to day vagaries of our markets anymore.

I am not sure what was getting bought today to be honest as the Dollar was down, equities were down and commodities were GENERALLY down. Maybe it was a "Stuff the Money under the Mattress" trade.

Either way, the bounce in gold did not last very long. That is typical of most short covering rallies. They generate lots of excitement, like a flash in the pan, and then burn out nearly as fast as they started.

As stated yesterday, gold's big test will come tomorrow (Friday). That is when we get the latest jobs number. A surprise on the headline number to the upside will more than likely fan the talk about "Tapering" and we all know by now what that means for gold, and it ain't good. The converse is also true however. If the number disappoints, tapering talk will disappear and that should put some weakness into the Dollar and by consequence, strength in gold. Either way, we will see.

Interest rates have been slowly grinding higher. The yield on the Ten Year peaked at 2.873 today. Also 30 mortgage rates registered a ten-week high today according to a report in Barron's. This is the sort of thing that makes attempting to guess what the next move of the Fed is going to be rather difficult.

Every time these longer term rates have been sneaking up and pushing up mortgage rates in the process, it has checkmated the Fed which cannot then sound any sort of hawkish note on the bond buying program lest they end up causing interest rates to spike even higher quite rapidly. That of course would effectively short-circuit any so-called "economic strength".

Back to gold for the moment... it looked to me as if sellers were a bit hesitant to get too aggressive ahead of that payrolls number tomorrow. Selling did take the market down near $1216 but it popped a bit higher after the bears' caution became evident. Watch out however if that number comes in above expectations tomorrow. Bears will be growling in a big way.

The gold shares as evidenced by the HUI surrendered all of yesterday's nice gains, and then some. The sector continues to implode. That is about all that anyone can say about these things right now. Only the most die-hard of long term bulls are left in them at this point.

In looking over a few issues in particular, I noticed that Goldcorp put in a new CLOSING LOW for this leg. It is back to levels last seen in December 2008. ABX is back to levels seen in 2003!  The shake up over there is welcome but they have a lot of work to do, that is for sure. Maybe they will get a decent risk management department as part of their housecleaning. They had better!


Crude oil ran into a wall near $98 today. It has come straight up for more than $6.00 and is taking an overdue breather. Yes, I understand all the bullishness about the new pipeline coming online next year but even at that, there is an awful lot of oil around. Maybe demand is up for this, maybe not. I have a SHOW ME attitude on this one especially given the weak state of the economy.

What's helping crude right now is the frigid weather which is generating a great deal of heating oil usage. Exports of products seem pretty decent as well.

Along that weather line, natural gas prices spiked higher today as well. Seeing nat gas with a "4" handle is taking some getting used to considering that it had not been able to climb through that level for the better part of some 19 months or so starting in July 2011. It briefly kicked through $4.00 early this spring and then promptly collapsed back down towards the $3.25 level. Cheap prices for the clean burning fuel has resulted in a large amount of demand shifting away from coal into this market and now that we have some cold weather, it is catching some buying. If it can climb above $4.50, it has an outside shot at making a try for a "5" handle.

Other than this, not much going on today as most of the major markets are bracing for tomorrow's numbers. That is when we will get the fireworks. There does seem to be some building nervousness which is registered in the VIX. It actually closed above 15 today, the first time it has done that since October 15 of this year. We are definitely seeing some two-way trade in equities as a result, something I might add that we have not seen a lot of this year. Lots of top picking is occurring. At some point the bears will catch it correctly. Maybe that will come tomorrow, then again, maybe not! We just have to wait and watch the price action subsequent to the payrolls number and formulate an approach at that point.

US economic data spurs Commodity buying; Equities weaken

We were treated to several pieces of economic news in today' session. The ISM number, private jobs numbers from ADP and New home sales.

New home Sales numbers were up 25% in October compared to September. The spike was the sharpest monthly increase in more than 30 years. It should be kept in mind however that the September number was especially low.

Some things I am taking away from this report - first, the average price range of the homes sold was lower. Second - home mortgage loan rates have been rising. That is pushing down the price of the home that many buyers can afford. They are obviously opting for lower priced homes.

Regardless, that coupled with the news from ADP that 215,000 private sector jobs were added last month ( the market was expecting 178,000) brought in a significant amount of buying into the copper market. That yanked silver higher as those two metals have recently been moving more or less in tandem.

Later in the session gold then seemed to finally catch up as we got yet another one of those sharp, short covering rallies that gold has been famous for over the last few weeks. We'll have to see how long this one lasts. AT least the mining shares as evidenced by the HUI stopped moving lower today as well. For once we seem to have those going higher alongside of the actual metal on the Comex. That is always helpful to the bullish cause.

I am really not quite sure what the catalyst was for the pop higher in gold other than the fact that it managed to hold above an important chart support level near $1200. Also working in its favor is the fact that crude oil prices have been moving strongly higher now for the last few days. Traders continue to anticipate that the opening of that new pipeline from Cushing down to Port Arthur is going to relieve the burgeoning crude supplies at that key point even though stocks of the black liquid remain extremely high. Notably, refinery runs are very strong and this is helping to pull down the number of barrels in storage. Traders are expecting these newly refined products to be exported out through the Gulf of Mexico. This continues to put a floor under the unleaded gasoline market which had been dropping rather precipitously of late. Heating oil prices are firm. Lots of cold weather around.

We also had another burst of money flowing into the soybean and corn markets this morning. In effect, we had higher energy prices, some higher grain prices, a rise in cotton, a rise in the base metals, etc... It seemed as if the play for today was to generally buy commodities once again. When you get the kind of rally that we witnessed today in copper, and then in silver, it is going to be hard to press the gold lower. That means short covering as shorts do not want to lose profits or if they have sold near the bottom, develop large losses.

Interestingly enough, the sharp spike in interest rates did not offer much in the way of support to the US Dollar. It basically floated around the unchanged level for most of the session. That makes the strength in some of the commodity markets all that more notable.

I keep watching this S&P 500 and it keeps looking the same to me, namely "toppy" but so far it continues to hold up. I am once again noticing a higher day in the VIX. With the yield on the Ten Year note reaching a high thus far of 2.852%, we might be seeing a general round of NERVOUSNESS beginning to creep into these equities. I remain of the view that equities are going to have to break down to give us a SUSTAINED move higher in gold.

I mentioned that I would be watching the gold delivery process as it unfolds for the month of December. As expected, JP Morgan continues to be the standout LARGE STOPPER for their HOUSE account. Morgan has been buying the physical against hedge fund selling.

Gold's bounce up and away from that critical chart support level down near $1200 has been impressive. No doubt there will be some technical chartists looking at this and calling a double bottom on the intermediate term chart. I will need to see the metal scale $1280 at a minimum however and RETAIN those gains before concurring with that view. I would also need to see some more definite signs of a solid bottom in the HUI as an additional confirmation.

Also, the big test for gold, will come this Friday as we await the next payrolls number. If the number comes in stronger than expectations, look for that TAPERING chatter to start up again which would likely pressure the gold market as it should bring some strength into the Dollar.

The problem that the Fed has however is the same as it experienced this past summer. Rising interest rates threaten to crimp consumer borrowing. The Fed gets extremely nervous as a result when the yield on the Ten Year starts creeping closer to that 3% mark. If the bond and note markets react to the number by pushing lower and thus kicking rates higher, Fed officials, especially the more dovish ones, may not welcome the higher long term rates. I would expect them to hit the microphones and beginning tamping down any tapering expectations if that is indeed the case.

Keep in mind that as traders we are watching for a change in inflation expectations/sentiment to occur in the market. Once that occurs, the metals will respond accordingly. Until it does however, rallies will be viewed as shorting opportunities. Stay nimble and do not get married to any particular view. Let the market tell us when things are changing.

Copper going in one direction; Equities in the other

Most of the readers of this site are market savvy enough to understand the connection between copper prices and the overall global economic picture. It is not called, "Dr. Copper" for nothing. All things considered, one would normally expect to see Copper prices moving in the same direction as equities. In a normal world, this would confirm that stocks are moving higher based on solid, economic performance in general while industrial demand and global growth keep copper prices supported.

That has obviously not been the case for some time now. Part of this is due to the increased supply of copper that came on line as a result of the push into the $3.75 - $4.50 price region. The response from miners was to ramp up production. This new supply has been unable to be absorbed at those formerly rich prices and thus price has been moving lower as copper seeks an equilibrium between supply and demand.

Price is now moving into a zone of strong support which has held the metal for well over a year now. Should this zone give way, and I want to emphasize that I am not saying it will, it would signify that in spite of Central Bank efforts to prop up global economic growth, such efforts are failing. I suspect that even the high-flying equity market would not be able to ignore such a signal for very long.

Take a look at a chart I have created comparing the price of copper against the emini S&P 500. Notice that since 2008, the general price movement of both items has mirrored each other. Copper prices have tended to rise and fall right along with equities. That is "normal". What is not normal is what we have had since February of this year when a huge divergence formed. While copper prices moved generally lower, stocks of course have been heading into the stratosphere.

How long this sort of abnormal disconnect can continue is anyone's guess but in my mind, it merely confirms the view of those of us who believe that the equity markets are nothing but a massive Federal Reserve-fueled bubble being supported only by huge doses of the bond buying programs of these Central Banks. Sooner or later, all markets tend to revert more to the norm. This is the reason why I am closely watching the copper market as it now enters the region of chart support.

Another reason I am noting copper because silver prices have tended to move more in sync with it of late. This goes back to that industrial component of the grey metal. If copper prices are not reflecting solid economic growth (especially in the realm of manufacturing), then silver is going to struggle UNLESS THE FOCUS OF INVESTORS SHIFTS TO ITS PRECIOUS METAL ASPECT. Even at that, it would necessitate a reason to buy the metal and that reason would be a shift in inflation expectations which currently are non-existent in the minds of the majority of market players.

We currently have these two factors therefore working against any sort of sustained rally in silver prices; namely sluggish economic growth worldwide and a lack of inflation expectations. If one or both of these factors shifts, then silver should find buying support. We do want to watch how copper handles itself if it were to drop into this red rectangle. If it can manage to bounce up and away from this region, we should see silver catch some of that as well and perhaps cement a bottom on its chart. Time will tell...

What's Up with the VIX?

One of my favorite Sentiment Indicators has been and continues to be the Volatility Index or VIX. I prefer to call it the Complacency Index. Low readings, such as we have been recording for some time now, indicate the absence of investor fear or concern. High readings reflect worry or uneasiness. Sky high readings indicate PANIC.

I am not sure what is going on but the VIX has scored a five week high today for some reason. I tend to watch this indicator in conjunction with the action in the equities as a way to gauge any potential shift in overall confidence.

In my view, the only thing that can bring a firm bid into gold and reverse the current bear market in the metal is a heightening of fear/unrest/unease or better, a growing lack of confidence.

Yesterday we had a move higher in the Dollar. Today that has been erased. With the Dollar weakening gold is getting a bit of a bid today. Also aiding the metal is the sharp, and I do mean 'sharp' rise in crude oil. It touched $96 ( basis WTI ) in today's trade and is currently up over $2.00 barrel as I type these comments.

Let's continue to monitor the progress of the VIX and especially monitor the price action in the S&P 500. Upside momentum continues to wane in the latter market but then again it has been for some time now. I keep picking up one negative divergence after another but the market keeps shrugging those off with dip buyers continuing to come in. If the stock market does finally actually respond to one of these negative chart signals, I expect the VIX to jump even more. At that point we will watch gold closely to see if it can gather some better buying interest.

Stay tuned...