"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Tuesday, November 29, 2011

Commitment of Traders reports confirms effects of Risk Aversion trades

This past week's COT report was delayed until Monday (yesterday) on account of the Thanksgiving holiday. It does however confirm the market price action in both gold and silver which are currently stuck in no-man's land experiencing range bound trade with firm resistance on rallies and good support on dips.

Simply put - speculative interest in the metals has dampened off considerably as more and more traders/funds move to a cash position and lower their overall exposure to the commodity sector in general (risk assets). This is particularly evident among the general public, the small spec category, which have fled both silver and gold. In the case of gold, this category of traders is now holding the smallest net long position since February 2010. They have also cut their net long exposure to gold about 44% since the peak made back in March of this year.

 The big hedge funds continue to draw down net long exposure as well. This is not a recipe for higher prices.

While the reports indicate that a thorough cleansing process of both metals has been underway, it also confirms why neither market can currently get anything sustained to the upside. There is simply not enough speculative interest to push prices sharply higher at this time. Something will have to change on the fundamental front that triggers a strong desire on the part of the speculators to bid up the prices of both metals.

Keep in mind, there is nothing bullish about COT reports which show a fall off in speculative demand. Our modern markets are driven by money flows and money flows come from speculators. Until and unless they come into a market in a sustained fashion, prices will not be able to escape pressure related to commercial selling. The only thing "bullish" about this week's reports is that they do show plenty of room for this sort of speculative interest to build ONCE SOMETHING TRIGGERS THAT BUYING INTEREST. Until it does, neither one of these markets will be able to escape the range trade that currently holds them in check.

One other thing - a large part of the fall off in open interest in both metals is due to spread trades being taken off. Those are primarily a function of speculators playing differentials between various contract months. The fall off in the number of spreads also confirms the waning speculative interest in both markets.

Lastly, Silver continues to see the Swap Dealers increasing the size of their net long position. You've got to go back to April 2009 to see anything resembling this size exposure to the long side in silver by this category. That is rather interesting. This category is difficult to decipher because they can be putting on positions for clients, trading for themselves or hedging private contracts. But it could be that this is the reason silver has thus far been able to consistently bounce off the $30 support level. The Swap Dealers seem to be pretty comfortable with long side exposure in the metal down there. My guess is that if and when silver prices do eventually mount an upside breech of overhead resistance and begin a trending move higher, these traders will be selling out longs, booking profits and then moving back to the short side in a more conventional pattern for what we are accustomed to seeing with this group.


  1. Hello: I am "the general public, the small spec category, which have fled both silver and gold.'

    And I am buying with two fists.

  2. MFGlobal type risk out there? History is stranger than fiction -Broker T. Washaton

  3. Hi Dan,

    First, I need to thank you again for sharing your observations. I don't thank you often enough and that's my bad. Thank you!

    My version of this moment is that precious metals are going to trade sideways as the Europeans and global "Fiateers" everywhere bellow and holler at each other in a futile attempt to sort out the relative values between each of their respective pieces of paper. (In the world of paper currency, two blues for one gold equals three and half greens, except a Prince trumpts a Duke, and a King is over a Queen, but a President wins it all...something like that.)

    Then congress needs to bellow and holler at each other over the deficit, the debt and which party is the most demented.

    And, in case no one has noticed, there is a war going on almost everywhere -- with words or with bullets -- and no one is winning, everybody is losing.

    Oh, did I forget to mention that the titles to all worldly possessions and property (also known to banksters as "The Collateral") are being consolidated into coffers of a few "Plutoreans". The "Plutoreans" are likely the Chinese, the Russians and the Middle Eastern members of OPEC.

    So, I predict that cash will be king for a while; that is until all the campers on American strees get so restless as to really occupy and protest in earnest and in more places than Wall Street and smaller Main Streets...or, until something weird and war-like happens between Israel and Iran, or between France and Germany...or between Washington, D.C. and the rest of the country.

    There are so many externalities in-play and any one of them could cause precious metals to skyrocket again.

    However, my money is on the folding money for the time being; I am betting on cash until the dust settles.


  4. I love your blog and analysis Dan. Please don't stop. I would consider myself a bigger than small speculator, and I'm holding cash for the simple reason that I expect a liquidity event to push the price of silver down to $25 or so.

  5. This is a must watch video. 30 minutes to explain very simply and clearly why the current money as debt monetary system and exponential economic growth model are doomed to fail. And they will fail very soon due to their exponential nature.

    Chris Martenson Lecture On Why The Next 20 Years Will Be Marked By The Collapse Of The Exponential Function


  6. This category is difficult to decipher because they can be put in positions for clients, trading for themselves or for protection from the risk of private contracts.

    Day trading help

  7. Wow, great article, I really appreciate your thought process and having it explained properly, thank you!

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