"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


Friday, December 6, 2013

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.