Hedge Funds Exiting Gold once Again

Take a look at the chart and you will see what I meant in choosing the title for this post.

In the last two months alone, the NET LONG position of the hedge fund community has been cut in half. That has come about by a combination of both long liquidation and the addition of new short positions. Currently it is at 71,376.

What is rather disturbing is that the number of outright long positions ( both futures and options combined ) of 129,921, remains rather large compared to the last time gold was trading near these levels in the first week of June of this year.

Back then, hedge funds were holding 121,428 outright long positions when gold was at the $1244 level. Their short holdings were at 70,364 compared to this week's 58,545. That put them at a NET LONG position of 51,064 compared to this week's 71,376. That is a net contract difference of over 20,000 contracts!

That is why it is important that $1240-$1235 did not hold. The potential for additional long side liquidation PLUS net shorting from these technically oriented hedge funds, opens additional downside probabilities. If the funds begin to wash out and also move more towards the short side, the selling pressure would intensify. It would be enough to set up a test of $1200 without some sort of upside catalyst occurring very, very soon.

Weekly HUI Chart by Request

For those interested in looking at the mining shares ( frankly there are a lot more interesting charts than gold miners to look at right now) here is the weekly chart of the HUI.

Here is a quick overview....

The index has managed to avoid breaking down below the key 200 level; however, upside progress has been minimal. Note the series of lower highs indicative of general weakness in the sector.

This week's close pushes it back below the major moving averages that I track with it looking like a new downside push back towards 200 is possible once again. Much will depend on how the Dollar functions next week and what we get coming out of the Fed.

This index has been limping along in a lower grinding pattern for the last 21 months after suffering a devastating collapse two years ago when it failed to clear 525.

For now, the most likely pattern is more of the same grinding sort of trade. Value based buyers are bottom fishing in the sector on ideas that the stocks have been beaten up so severely that they have pretty much factored in the worst. The problem for these shares is that IF GOLD WERE TO LOSE $1200, and not be able to recapture it, many who bought the shares will throw them out fearing another fresh leg lower in the precious metal.

Either this index needs to get above 280 for starters, and preferably close the gap at 300, to turn sentiment or the gold price will have to jump sharply higher from current levels.

By the way, here is a current chart showing the HUI compared to the price of gold in a ratio. For the shares to lead the metal higher, this ratio would need to take out .200 for starters....

Speculators Bearish Towards Copper

Here is a  look at the current ( as of this Friday ) positioning of the players in the copper market. As the regular reader will already know, I pay very close attention to two key markets - Copper and Crude Oil, when trying to ascertain what the sentiment is of investors/traders towards overall economic growth.

I recently posted a chart detailing the performance of the S&P 500 versus the Goldman Sachs Commodity Index showing the vast underperformance of the commodity sector against equities in general. My conclusion, based on that chart, was that global growth was mediocre at best and that stock market strength is more a function of Yield Chasing by speculative forces in a near Zero interest rate environment rather than evidence of a robust growing economy.

The shift in speculators, especially the large hedge funds, into playing copper from the short side, confirms that view in my own mind.

Notice earlier this year how upbeat the hedge funds were on the future prospects of copper. July of this year saw them very optimistic. Here we are a mere two months later and they have completely reversed sides and have moved to a net bearish position. That dichotomy between the "other large reportables" category and themselves has evaporated ( although the former category is in the process of covering existing short positions ).

What to make of this?

Take a look at the copper chart and tell me what you see here.

Does this chart even remotely resemble one that is the least bit bullish? Of course it does not. Copper is continuing in its now 3 1/2 year old bear market.
Highs are progressively lower and lows are getting lower. What this tells us is that global demand for copper is not keeping pace with the increases in supply. Another way of saying that, is global growth is not strong enough to generate sufficient demand for the red metal that will allow it to eat through the available supply.

That is hardly the thing out of which strong, runaway inflation pressures are born.

By the way, here is an updated chart of the overall commodity sector as of the close of trading this week. Again, I am using the Goldman Sachs Commodity Index or GSCI.

The sector notched a 27 month low this week.

I have commented in the past that silver and copper tend to move in rather close sync.

Here is a chart of silver.

As you can see, the chart pattern is very similar to both the copper chart and the overall commodity sector, although silver has been bouncing around going nowhere for the last year.

What explains this lack of performance to the upside? Answer ' "Price manipulation" will scream the usual culprits. "The powers that be are actively working to manipulate the silver price lower!", they will breathlessly assert.

That is not the case however. Look at what the hedge funds are doing in there. They are abandoning the long side and beginning to move more towards the short side of this market as well, just like they have done with copper., and I might also add, a host of other individual commodity futures markets.  I would guess, because this COT data only covers through Tuesday of this week and did not catch the fall through support near $18.60, that the hedge funds may now, as of this Friday, be net short in the market.

Keep these things in mind when you read outlandish predictions of roaring silver prices "any day now". Such claims are laughable at face value because they are based on NOTHING but someone's fevered imagination. Those who make such rash claims are exhibiting in full public, their apparent need for some sort of self-aggrandizement to make them stand out from the crowd. Serious traders will ignore such shills. Professionals DO NOT MAKE PREDICTIONS; they read the market and attempt to discern what it is saying.

For silver to turn around sharply, there will need to be some sort of catalyst in the form of a shift towards strong global growth, strong enough to generate inflation concerns and cause an inrush of money flows into the broader commodity sector. For the time being, that does not look to be on the radar screen.

How it handles this level near $18.60 will be critical. If it can hold near here, it will have a chance to reverse course and move back to try for a test of $20. Above that $21.50 stands as a huge hurdle to any further upside progress. At this point, the trend in silver is sideways to lower and unless we see something change on this chart, that is the way it looks as if it will continue.