"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


Saturday, April 20, 2013

Gold Commitment of Traders Explains surge in Open Interest

Many commentators have been confused by the recent open interest readings that we have been getting out of the CME Group detailing the movements of traders into or out of the gold futures markets. They have been looking at the huge increase and have been somewhat baffled at best and downright confused at worst.

While there is no doubt in my mind that it was a series of extremely large sell orders that got this downside ball rolling something else is going on that explains these open interest readings.

The usual pattern that we have seen in the gold market over the last decade-plus bull market has been a build up in the hedge fund long positions as they buy the market which is countered by the bullion banks and swap dealers taking the other side of that trade and going short. At some point, the market stalls in its upward momentum, a trigger occurs, and then the price reverses as the hedgies sell out or liquidate their long positions. This selling is then met with buying or the covering of shorts by the bullion banks and swap dealers.

At some point, the buying in the physical market becomes so large that it prevents any further downside price movement whereupon the market then stabilizes and the process repeats itself with price going on to make yet another high.

During these periods, many expect to see open interest shrinking as the price descends because it shows that many participants are reducing their positions - the hedge funds are getting out by selling previously established longs and the bullion banks and swap dealers are getting out by buying previously established shorts.

When open interest readings increase, it tends to confuse some as it seems to contradict the usual pattern that has become so familiar. What is leading to confusion is that the SPREAD POSITIONS of some of the LARGEST TRADERS are not taken into account.

I have graphed two of these categories for you to see and noted the price action in gold that occurred over this same period. The two categories are the SWAP DEALERS and the OTHER LARGE REPORTABLES.

This latter category includes the likes of CTA's (Commodity Trading Advisors), CPO's (Commodity Pool Operators), Large Locals from off the Pit Floor and other Large Private Traders. While these groups do not have quite the same impact as the enormous Hedge Funds, they are still large enough to affect trading.

Can you see the big spike higher in their spread positions back in August 2011, when gold shot up to $1924 and then collapsed all the way to $1535 before it stabilized? Now look at this past week's spike higher. See a pattern here? By the way, the sharp increase in the number of spreads put on by the Large Reportables Camp ( 87,178) was the largest single week increase for that camp on record. The increase in the Swap Dealers' Spread position (+49,768) was also a weekly record.

There is your REASON for the SURGE IN OPEN INTEREST.

There is a strategy behind this which I will not get into right now in detail due to time constraints ( soon coming attraction) but suffice it to say for now that it is an attempt first to get downside protection and cushion losses for those who are long and are on the wrong side. Second - the proper use of a spread position can be very advantageous to traders who can time the markets accurately enough to leg into and leg out off these spreads. It requires considerable skill however to pull this off and trading accounts large enough in size to allow for the jump in margin requirements as one leg of the spread is lifted.

IF we leave off the impact of these spreads in the overall open interest numbers, it would have only seen an INCREASE of +14,460 compared to the previous week. This was based on the bullion banks increase of both their long and short positions (which incidentally favored more longs at this point than shorts) and an increase in the SHORT positions of the small specs, the general public who sold down into what might turn out to be a hole. When we take into account the sharp increase in the number of spreads, we see a completely different picture with open interest increasing over 154,000 contracts this week alone.

Therein lies the "mystery" for the open interest readings for the past week. If gold stabilizes here and begins to base build, watch for these spreads to be drawn down.


  1. Thank you Dan, you're the best.

  2. Thank you for the level-headed commentaries. The wild arm-waving from the fanboi sites does not help anyone.

    What is your opinion of Sinclair's changing his price target to $50,000? Just a month ago he was saying ~$5000. That order of magnitude change indicates, maybe, that he thinks the transition to a new monetary system won't be smooth.

    I'm also not seeing an upside price catalyst. Maybe after the summer something will happen.
    Since this is a paper-driven market, the physical uptake by individuals won't pull the price higher in REAL TERMS. I mean, if the price goes a couple $ higher for silver, the premium will melt out. Therefore, some months of price stagnation seem to be in our future.

    1. Having watched the gold market go from 500 to 1900, one would think that the side that has all the money is the bullish side. The bulls should be able to support this market at any price. After this last week, I wonder why they let the bears slaughter them. There are more reasons now to take out 1900 then at the time it happened. I know people talk about time and consolidation periods, but is it really necessary in this case? Why not just open the market on sunday night at 1540, and say to the bears, your turn to be killed? Why even give them a chance? They took if down from 1540 to 1310 in a matter of hours. Do the same bulls. And then the decline last week would be looked at as the greatest trick of all time on the bulls. And the weak ones would have to scramble at much higher prices to get back in. This may not happen, but I dont know why it couldnt. This market doesnt need a catalyst. 17 trillion debt, 0% rates, and infinite money printing. What more could one ask for.

    2. Dan, I both follow and appreciate your analysis of the Friday Commitment of Traders release for Tuesday April 16th. The spreading, as you point out, accounts for virtually all the increase in open interest from the Tuesday prior April 9th.
      The CME daily futures report for April 9th shows an open interest of 416,513, and the same report for April 16th shows an open interest of 413,083.
      I do realize that above daily report numbers are for futures only but would have thought that there would have been an increase as well.
      How to reconcile the Disaggregated Futures Only report with the Disaggregated Futures-and-Options -Combined report would be my query.
      Any help would be most appreciated!!!!!

  3. Just one more point. The chinese have been encouraging people to buy gold at much higher prices. They have trillions of dollars. What better time to put them to use then to buy gold right here and now. Otherwise the chinese people could easily say, that was a pretty stupid thing to do to buy gold above 1540. There is no reason to look stupid when there is really no reason for gold to be below 1540 anyways.

  4. @ Arnie

    What do you mean by 'Why not just open the market on Sunday night at 1540'?

    Just how do you think that could be accomplished, and by whom?

    How much cash would you calculate that it would take drive the price up to 1540, even on a highly margin-based futures market?

    Then consider how much more (like twenty times) more cash would be needed to hold those contracts to delivery?

    It is apparently much easier to drive the futures market down through the longs' stops with massive HFT shorts than it would be to do the opposite, as huge amounts of real money would be needed.

    1. I remember years ago around the time of the first gulf war I was trading s and p. The market the day before it started was trading around 312. The very next day the s and p opened limit up and to this day has never seen that price again. All the bears were trapped.This could be the same kind of bear trap. The chinese have enough money to just bid 1540 and buy all that is offered there and just keep buying. The bears will have no where to go. The low will be in. I do not think that the sellers have that 500 tons to deliver. I dont even think the US has the gold to give back to germany. So this would be a great play. Maybe the chinese will read Dans blog and get the idea. It would be magnificent.

    2. If the chinese want to buy more gold they want to buy it cheap. Why would they want to buy for 1540 when they can wait and start to buy it at 1000 or 800? Time and the shorts are working for them now.

  5. @ Arnie

    Let me just simplify my previous comment by pointing out that the shorts are selling, whereas longs have to buy.

    It only costs the shorts anything if they have to eventually buy back at a higher price.

    Longs have to have upfront cash in their trading accounts, and will face margin calls if the price goes down.

    The price of gold can regain $1540, but only slowly, as well-heeled buyers overwhelm the very well-financed short sellers with their HFT robots dominating the market.

    1. And by the way, if the shorts dont have the gold to deliver, how much money would it take to move it to 1540? Hardly any.

  6. Jim Sinclair: "The truth is that when we take out these futures markets on a failure, gold is going to $50,000. Not $3,500. $50,000. We are in the midst of a failure right here, right now. That’s what this is all about. This takedown has been the ultimate can-kick."

    Anybody who is predicting $50,000 gold is either a delusional or corrupt. I don't think Sinclair is delusional. Until a week ago his $3000 prediction seemed to be believable (to the amateurs like myself anyway). Now that the bears are out in full force and gold is flirting with a collapse to $800 he is coming out with even more delusional statements. I believe now that he has a strong financial interest to fool un-suspicious small investors. The only problem is that too many people who believed to him already lost a lot so at this stage he is making a fool of himself saying things like that. Beside I can't help but to think that he gets big commissions from the the gold dealers and miners for dishing out his delusional predictions. The game is over. He and many other paid gold pumpers have no credibility anymore. Probably he knows that that's why he is making a last desperate attempt to pocket his last paycheck from this gold bull-market.
    Since the bears took out the $1540 strong resistance so easily in a bull market I can't see $1300 will hold for a long time in a bear market. Unless perhaps if the USA will attack Iran before $1300 is taken out. Which is unlikely to happen.

    Excellent analysis by the way Dan. Thanks for that.

    1. Kris, before you kick Sinclair I suggest you do a little better research...He has forgotten more than you will ever know about the PM markets. He is gracious enough to share this information for free and he takes the time to answer his mail...If you wish to survive what's coming and the OBVIOUS manipulation I suggest you stay with physical gold or silver and leave the analysis to someone else.

    2. Please remember your comment and read it back in a year time when your physical gold will trade for 800. I will my one. If I will be wrong I will apologize. I hope I am wrong but I am afraid I am not.
      If he knows so much about PM he should have put manipulation into the account too and than he should not have promised 1540 as a bottom.
      In fact it is foolish to promise anything as a bottom unless you are one of those guys who are driving the market.

    3. Sinclair gave much too much time to small people like me, answering patiently and directly many mails to be corrupt or have a hidden agenda.

      It is funny to see how fast opinions can change.
      One day the guy is one of the greatest experts of the gold market, rarely appearing anywhere, respected like a demi-god.
      The day after, he is Jim Alzheimer Sinclair, delusional and living secluded with his dogs and his advisor Petunia, Jim the cheater with a hidden agenda to f... the naive bulls.

      Can you just stay on the facts? :

      - Sinclair is making a long-term analysis of the market. His audience is gold community in physical, unleveraged, long-term investors. He gave a long-term price objective. Let's wait and see.

      -He, unlike Trader Dan, is not expert in the short term movements of gold (it's not his daily job, and actually I think he doesn't care much about short term variations). His main point is : get protected, buy some gold if you don't have yet, or you could be screwed. It's his main focus and I do think he's sincere.

      Now, people mix both long-term and short-term.
      Given his audience and his warnings, Sinclair repeatedly invited his audience to buy gold, whatever the price, and invited them not to keep looking an eye at gold price afterwards.
      He asked people to buy right up at 1800 $ an ounce, because you can't know when those things will explode higher, and a short term loss and high volatility are not important compared with the urge to protect a part of one's assets.
      I understood it that way, made a decision ON MY OWN, and I'm not bashing him for making me make a wrong move.
      Now some who don't read him well are judging him because he's repeatedly wrong on the short-term bottom of gold. They are right! He's been wrong, since 1800. And I think he shouldn't have said anything some weeks ago about that bottom being made, his birthday as the end of the correction, etc...but if you bought gold reading his site, then you bought to protect yourself on the long-term, not to speculate with leverage in the short term, and such bashing is unnecessary.

      Anyhow, the guy is honest and dedicated, even if he made a wrong call. No need to spend so much time individually with small investors if he wasn't.

    4. Well making a call for $50.000 gold is outright ridiculous. Especially when it is on the verge of a collapse. If he is honest than sg else must be going on in his mind...

    5. Can't blame you for this statement. Seems he went all-in with strange price forecats recently, but I just like to remember the core of his message which is : take some precautions and have some real assets such as gold in case of a systemic collapse event.

      Now, he is convinced that paper market's days are counted.
      That's why I asked Dan his take about this.
      I'd humbly think that all this mess will end-up in a catastrophy someday, but sooner rather than later? Before they strike gold and send it down even further towards 1200? I'm no specialist, but I'm not making this bet on my trading account :)

    6. How do you know it ridiculous if you don't know his reasoning behind it? Just sayin'

  7. Sinclair is a classic megalomaniac. He is so ridiculously sure of himself and his self-created delusions that he cannot see the abject deflationary forest through the demand destruction trees.

    Let me make it as simple as I can.

    The natural evolution of a debt bubble's aftermath is a deflationary deleveraging. In such a scenario economic activity slows, velocity of money slows and central bank liquidity support initiatives have less and less efficacy. Prices fall and folks have less money. Spending declines and that includes gold purchases. The dollar spikes and gold falls in dollar terms.

    $50,000 gold means 100 troy ounces...!! $500/oz.

    1. Its just the opposite of what you say. Unless there is going to be a Government default on its debt, the aftermath is inflation, not deflation.

    2. Inflation will come....after deflation though...

  8. "Can you see the big spike higher in their spread positions back in August 2008, when gold shot up to $1924 and then collapsed all the way to $1535 before it stabilized?"

    Don't you mean August 2011?

    1. headsuplads;

      thanks for pointing that out to me... I must have had 2008 on the brain for some reason... yes, it is August 2011...


  9. Dan, I have one simple question but imho important really.

    Analysts expectations vary from 1000 $ and less to 50.000 $ as you know.
    Main divergence seems to be : is the fractional gold reserve system about to end, or will there be still a lot of time with both paper and physical markets?

    Do you have an opinion on this specific point?
    Wishing you a great sunday,

    1. P.S : I'm asking, because short of a spectacular event,

      - massive confiscation of depositors Cyprus style in US or Europe
      - massive devaluation in a key western country over weekend
      - sudden krach of the dollar
      - sudden major loss of confidence in the fiat (but it requires a strong trigger for the sleepy lemmings to Wake up)
      - explosion of the gold paper market due to massive physical buying and no more gold to provide
      - sudden revaluation of gold price by major central banks

      , I don't see much hope for the bulls on the short and middle term.

    2. Hubert;

      I honestly do not have an answer to that question. Price predictions have never been my forte as a trader. I have to react to what I believe the charts and price action itself is telling me what others are thinking in regards to market sentiment.

      I learned this the hard way through experience trading. I would have a profitable long position on, for example, and price would reach a certain level that I thought "No way this market can go any higher than this" so out I would go from my profitable position only to watch the market continue heading even higher and higher as I sat on the sidelines kicking myself.

      Same on the downside on some of my profitable short trades in various markets. Fortunately, these were mistakes I made mainly early in my trading career and thus learned not to try to target various levels from that point forward.

      The difference with gold is that trying to ascertain a price based on fundamentals is very, very tricky because gold, unlike soybeans or wheat or corn, etc. is an alternative currency. Who can really say what price people are willing to pay for an ounce of it if they believe the monetary system is failing? I never lived in Argentina but my guess is that had I been there back when their currency was imploding years ago, I would not have cared what I had to pay for an ounce of gold as long as I could have gotten rid of my pesos in exchange for it.

      The truth is the real difficulty all of us are having is ascertaining whether deflation is winning this battle or the Central BAnks' reflation efforts are able to ward it off and induce inflation instead.

      This is why I believe the key to knowing where gold is ultimately going to go is CONFIDENCE. When that goes, and who among us can say with any certainty, what sort of confluence of events can cause it to vaporize, then gold will finally respond.

      In the interim, it will move based on demand. I want to see investment demand come back into gold on the part of the large speculators such as the hedge funds before I will feel that the worst is completely over.

      AS stated before, physical demand is astonishing robust down below $1360. That has put a floor in the market for now. In itself, however, that is not enough to take the market sharply higher. It is one thing to bottom a market; it is another thing to turn it immediately into a strong sharp upward rally that never looks back. The latter requires FEAR and right now global investors are obviously not concerned or fearful about much of anything besides falling commodity prices in general based on the CCI.

      The point in all this is that we are all going to learn exactly how this grand experiment in Central Bank alchemy plays itself out!

    3. On main street their is alot of fear. Not fear of markets but being able to feed families, make enough on savings to live without starving or losing homes or their ability to get ahead. Ah, but the supremeist only see it from their perspective, and hence they think the stock market holds the key to keeping the society functioning right now. How they have been able to deflate everything but the stock market has truly been a feat I could not have forseen. But asyou say the grand experiment is far from over. Recent moves by Japan show that maybe the experiment is accelerating. If it continues while the US labor participation rate continues, all the MSM shouting will not keep the American people from complete destruction. At that point meltdowns of paper will take days not months. That point of time is nearing with desperate acts of recent days.
      Right now very little confidence in government leaders exist, take away entitlements (or government ponzi thievery is what I prefer to call the SS fraud, medicare and medicaid programs)and this gets closer to occuring. I have lost any and all respect for our government and financial leaders. I know many who feel the same way. The Zirp Repression will eventually cause turmoil enough to flatten our country. Still amazed and angered. Thanks for providing an outlet and education Dan.

    4. Thanks!
      As they say, no matter what the price is, as long as it moves and we trade the right direction :)

  10. Thank you Dan, very interesting analysis!

  11. I guess it will all boil down to this. When gold takes out 1900, all hell will break loose to the upside. Until then, its in the mess thats its in. So there really is nothing more to add. See everyone at 1900.

  12. This comment has been removed by the author.

  13. @ arnie

    I tried to respond further up in the comments, but couldn't get it to work.

    Arnie, you write as if the Chinese are active on the COMEX. They are not. Not the Chinese government nor private Chinese importers.

    The COMEX is just a US side-show to the London Bullion Market Over the Counter 'market', which is not a market at all - it is just a name for all of the private deals involving unallocated gold but which can in principle be changed to allocated metal at the request of the buyer.

    The Chinese don't even use the LBM OtC channel to buy, although they probably do hedge temporary exposure there, as when purchased gold is in transit. They deal, privately, with bullion banks and if possible directly with refiners.

    That is why no one who knows has to reveal how much gold the Chinese government has been buying in recent years. All that is known publicly is how much gold is moving through Hong Kong into China, and much if not most of that consists of 1 kilo bars, not LBM Good Delivery 400 ounce bars that the government may want in order to eventually back the yuan.

    Just why would the 'Chinese', government or private companies, be tempted to kill the goose that has been laying all those golden eggs for them by somehow demanding an immediate 500 tons in order to destroy the COMEX?

    Anyway, all those massive HFT short sales that crashed the COMEX price have been long since covered by the instigators and passed on to others at enormous profits.

  14. deflation is coming and will knock out the gold bull dan.


    1. Alison,
      George Soros himself said he buys gold when a deflationary currency devaluation stagflation takes hold very similar to Carter years?

      If you get a depression (which we have been in for 5 years regardless of what the MSM has been feeding you for dinner) and countries all over the world have increased accessible Money Supply, and the need to build Bank Balance sheet has not performed in fighting the deflationary, policy, what is next?
      Full fleged increase in the Velocity of Money...They will now begin a release from Banks to business'.
      There is no demad..therefore, they will create it..
      After that I don't care how many PHD's say no inflation....it is currency induced cost pull inflationary!!!!!Physical gold goes up...currencies go down...black markets erupt..(See Bitcoin..but easily bounced)
      Thanks Dan. If you can keep us up to date on phsical movement we appreciate it. Appears it is steadily finding it's way into the MINERZ

  15. Hi Dan! Can you or some else here help me understand;
    1. As you mentioned, robust physical demand below 1360 was able to but a floor in gold (for now). I could be wrong, but was there not robust physical demand even at higher levels. With respect to silver for example, was there not articles coming out left and right regarding record sales of physical before the current lower levels? Yet, why was the astonishing physical demand (record sales) at higher levels not able to put a floor at the 1520 level for gold and 26 for silver?
    2. Is it truly, physical demand putting the floor or the culprits that drove the prices down with their sell orders, closed their orders and cashed in for profits below 1360?

    Physical demand from what I'm guessing would have an impact on the paper price in the longer term, but the short term price action is determined by paper right? Hence, if it was the hedge funds that managed the price down, they probably also managed the floor, and the physical demand did not have influence over the price management in the short term?


  16. I would like to quote Theodore (Ted) Butler from the article, The Good, Bad and Ugly;
    "Every day, silver (and gold) investors are subject to whatever daily pricing the big COMEX paper hangers decide to dictate, irrespective of what the real SUPPLY/DEMAND fundamentals would suggest."

  17. Don't know why I cannot seem to insert replies immediately following comments that are themselves replies!

    Anyway @ Arnie:

    I think that it was Dan himself who said recently that (paraphrased)

    Indeed the shorts don't have the gold they sell, but then the longs don't have the cash to pay in full for the contracts they buy, either.

    So, how much money would it take to push the price up to $1540?

    More than the longs can come up with! Right away, anyway.



Note: Only a member of this blog may post a comment.