A brief summary - All classes of speculators, hedge funds, other large reportables, and the general public, were net sellers of gold this past reporting period.
The other side of the equation, the buying, was done by the commercial category (bullion banks, etc,) and the swap dealers. The swap dealers, in particular, are a very good group of traders since they trade not only for clients and for the purpose of hedging, but can also speculate for their own interests.
I should note here that both of the latter categories, remain net short overall but continue to consistently reduce that position as they cover existing shorts and institute fresh long positions.
The small specs, the general public, are now showing the smallest net long position on record from this report which dates back to the beginning of 2006. In going back even further to 1999, they still have the smallest net long position that they have held in over a decade. That is quite remarkable!
The general public is usually a very good contrarian indicator as they are notorious for being on the wrong side of a trade at critical turning points. However, that does not mean that they are always wrong. You must admit, the small specs who have been playing gold from the short side have done pretty doggone well this year while hedge funds have not! Recent action however has not been kind to many of them since a great deal of them have sold short beneath $1400 are those positions are probably blown out of the water by now. Many of them were casualties of this week's rebound in price.
The hedge funds, while remaining net long, continue to rapidly draw down that net long position. As I suggested last week and it seems to have been confirmed this week, hedge funds covered some shorts LAST WEEK on the second attempt down towards $1330 that held. Then they waited for prices to rally towards $1400 whereupon they began to sell anew. It is this group which is selling rallies in gold and will do so until the technical posture of this market shifts from one being bearish to one being bullish. For that to occur, gold must recapture a "15 handle and KEEP IT!.
One thing we have yet to see is the hedge funds moving to an outright short position in gold as they have done in copper and may perhaps be threatening to do so in silver (its fortunes are tied to copper for the time being). This implies that should they actually begin as a whole to approach gold from the short side, the potential remains for their firepower to take price lower towards that support zone that has now been established between $1330 - $1325. That would indeed set up a battle between the physical market buyers of the metal and the paper sellers!
I covered this in this week's KWN Metals Wrap with Eric King over at King World News so be sure to tune in to that on Saturday when it is posted to here this in more detail.
Friday, April 26, 2013
Copper Bounces but will it Hold?
We have been students of Dr. Copper for a long time over here since it has a track record par excellence. This week the red metal experienced a bout of short covering from speculators who have been steadily pushing it lower for the better part of this year.
Again, at the risk of beating a dead horse here for the umpteenth time, I am on record here as stating the current rally in equities is nothing but a massive Central Bank liquidity induced bubble without the least bit of fundamental underpinning. My reason for this view - Dr. Copper, whom I trust far more than lemming like equity buyers, says "No Deal".
In spite of trillions of dollars in Quantitative Easing (the balance sheet of the Fed is now over $3 TRILLION and rising) the best the Central planners have been able to do is to generate economic "growth" a trifling bit north of 2%! That is astonishing.
Economies globally continue to either experience a slowing in the rate of growth or are barely limping along. The result has been rather lackluster demand for a metal which typically rises in price during periods in which growth is robust.
From a technical standpoint, copper hit a region (noted on the chart) in which it previously experienced a good deal of buying back during the summer of last year. That level extends from $3.10 - $3.00. When prices came into this zone last week buyers surfaced. They did again on a second test of that level this week. So far then support is holding and the market is stabilizing.
Incidentally, the Commitment of Traders report reveals some decent short covering on the part of the hedge funds as price held this zone. Now that we have seen price move higher, the question is whether or not they are going to re-enter this market on the short side and sell it down from this higher level.
Here is what I would watch more than anything else - be that talking heads on the various financial news channels, newsletter writers, etc. - the SUPPORT ZONE in this metal.
If it fails to hold price and copper begins a fresh leg lower, watch out. It will indicate that Central Bank reflationary policies are failing. Now the fools who keep chasing stocks higher and higher will probably care less but more savvy investors will take note of this barometer.
Quite frankly, I would not know what to expect from the Central Banks were this level to give way. Would they be forced to actually increase the level of bond buying? I am not sure. It all depends on whether or not the rest of the commodity world would follow copper lower. Either way, it would signal that deflationary pressures are overcoming Central Bank inflationary efforts.
If it holds, then the odds favor more of a range bound type of trade with prices moving back up some as traders/investors would see economic growth just strong enough to prevent prices from falling any lower but not quite good enough to see this market rocket up. In other words, a sort of uneasy truce between bulls and bears with bears banking on deflationary pressures to prevent sharp rises in price and bulls banking on lots of funny money to grease the tracks of the global economy to prevent any drastic decline in price.
The key point that I take away from all this - Central Banks are playing with fire by their continuing interference into the markets. Adam Smith must be rolling over in his grave somewhere.
Again, at the risk of beating a dead horse here for the umpteenth time, I am on record here as stating the current rally in equities is nothing but a massive Central Bank liquidity induced bubble without the least bit of fundamental underpinning. My reason for this view - Dr. Copper, whom I trust far more than lemming like equity buyers, says "No Deal".
In spite of trillions of dollars in Quantitative Easing (the balance sheet of the Fed is now over $3 TRILLION and rising) the best the Central planners have been able to do is to generate economic "growth" a trifling bit north of 2%! That is astonishing.
Economies globally continue to either experience a slowing in the rate of growth or are barely limping along. The result has been rather lackluster demand for a metal which typically rises in price during periods in which growth is robust.
From a technical standpoint, copper hit a region (noted on the chart) in which it previously experienced a good deal of buying back during the summer of last year. That level extends from $3.10 - $3.00. When prices came into this zone last week buyers surfaced. They did again on a second test of that level this week. So far then support is holding and the market is stabilizing.
Incidentally, the Commitment of Traders report reveals some decent short covering on the part of the hedge funds as price held this zone. Now that we have seen price move higher, the question is whether or not they are going to re-enter this market on the short side and sell it down from this higher level.
Here is what I would watch more than anything else - be that talking heads on the various financial news channels, newsletter writers, etc. - the SUPPORT ZONE in this metal.
If it fails to hold price and copper begins a fresh leg lower, watch out. It will indicate that Central Bank reflationary policies are failing. Now the fools who keep chasing stocks higher and higher will probably care less but more savvy investors will take note of this barometer.
Quite frankly, I would not know what to expect from the Central Banks were this level to give way. Would they be forced to actually increase the level of bond buying? I am not sure. It all depends on whether or not the rest of the commodity world would follow copper lower. Either way, it would signal that deflationary pressures are overcoming Central Bank inflationary efforts.
If it holds, then the odds favor more of a range bound type of trade with prices moving back up some as traders/investors would see economic growth just strong enough to prevent prices from falling any lower but not quite good enough to see this market rocket up. In other words, a sort of uneasy truce between bulls and bears with bears banking on deflationary pressures to prevent sharp rises in price and bulls banking on lots of funny money to grease the tracks of the global economy to prevent any drastic decline in price.
The key point that I take away from all this - Central Banks are playing with fire by their continuing interference into the markets. Adam Smith must be rolling over in his grave somewhere.
Gold Bounce coming to an End
Time constraints have prevented me from writing as much as I would have preferred to this week but I want to refer back to my last comments from Wednesday this week when I posted a 2 hour gold chart.
My argument back then was and still remains the same today - there is no enthusiasm to chase prices higher at the Comex gold market. That is indicated by the falloff in volume as price has moved higher. See the chart below....
In other words, this is more of a case of traders covering short positions out of fears popping up over bona fide reports of incredibly strong buying of physical gold than it is over a new found bullish enthusiasm on the part of the hedge fund/investment community.
Yesterday, the return of RISK ON trades came on the heels of the rotten economic data out of the Euro Zone. Once again we are in a situation where for the equity perma bulls, it is "Head's, I win; Tail's, you lose". The news was so bad that traders just knew it in their bones that ECB President Draghi is going to announce an interest rate cut next week. That of course is just what the equity bulls ordered.
Today however was a different case with the moribund GDP reading here in the US serving to remind us all that in spite of all of this reckless Central Bank liquidity creation, we are barely managing to limp along at the bottom when it comes to economic growth. Copper obviously wanted no part of this news today as it appears the short covering rally in that base metal might have come to an end also.
With the yield on the Ten Year Treasury note dipping back to 1.66% and with the 30 Treasury bond futures up nearly a full point today (not to mention the regularly recurring stupidity trade of buying the Yen as a safe haven), it is evident that whatever risk traders were willing to put on yesterday, they are taking it off today.
When it comes to gold here is the situation as I see it (nothing has changed in this regards but I want to restate it again) - Physical demand for gold is very, very strong; however, it is very, very strong at REDUCED PRICE LEVELS. Gold went on a fire sale last week and buyers jumped all over it. After all, a $200 drop in the matter of a couple of days is enough to get the attention of anyone wishing to acquire a metal that had a handle of "15" in front of it and then suddenly had one of "13". This has served to put a solid floor of support beneath the market and I believe a bottom that should hold if prices were to move back down towards that level in the near future for any reason.
The problem that I see is the same; while this sort of demand can bottom a market it CANNOT TAKE IT SHARPLY HIGHER without INVESTOR DEMAND from the hedge funds. Why? Because buying of physical is price conscious. People buy the stuff because it is so cheap. When it jumps back up too sharply, that kind of buying dissipates. What is then needed to take the price higher is the kind of mindless buying by hedge fund algorithms which have no conception of value whatsoever but are programmed to only chase motion.
Value based buyers acquire the metal when they perceive it to be cheap or underpriced. Hedge funds buy the metal when it keeps getting more and more expensive. Their buying kicks in when the value based buying eases off. Until the hedgies come in, what will happen is that price will move up to the point where the demand from the value based crowd gets choked off and loses some of its force.
The result is a market that has bottomed out but needs a shift in sentiment among the hot money crowd. With today's anemic GDP number, none of them are the least bit worried about inflation right now. Any doubts about that can be seen in the bond market price action as noted above.
The bulls did manage to take price through $1440, a level which earlier this week was attracting selling. When they then pushed it through $1450, traders who had sold against that level covered and that took it to $1470, another area that I was watching. Asian demand for the metal enabled buyers to take it another notch higher but as it moved into the mid morning of the Western session, the buyer just dissipated and short term oriented traders took that as a signal to close out some nicely profitable long positions recently established.
Notice how the volume LEAPS as the price drops. That is both long liquidation from day traders/short term guys and fresh shorting. The price action in the HUI, confirms that.
What we want to watch now is how gold acts as it nears the $1440 level. That level was serving as un upside barrier earlier this week and now reverses polarity and becomes a level of chart support. If gold can hold above this level, and so far it is, it will give bulls some confidence to wade back in and will make a few of those brand new shorts reluctant to push their positions. We would then expect to see the metal move back higher and take another shot at resistance. I would want to watch both the volume and the price action were that to occur to see if this thing has a shot at $1500. Remember, it is still an intermediate term bear market in gold so until the technicals change, strength will be sold unless we get a violation of resistance and a shift in the momentum of this market.
Did anyone notice how the miners faded well off their highs late in the session yesterday even as the rest of the equity world was celebrating another back slapping day of further giddiness. That was another clue that the euphoria in gold was about to hit a temporary wall.
The HUI managed to claw its way back into the technically significant gap region I have previously noted, but as expected, it could not CLOSE THROUGH the GAP to end out the week. That must occur for this to kick up another leg higher. It did manage to close in the gap yesterday but the manner in which it faded out towards the end of the session forebode further downside today.
What does this translate to in terms of the gold shares from a technical perspective as a result? Same as gold - the market posture is decidedly bearish but it does appears as if a bottom is in. The sector is lacking a strong upside catalyst however at the present time. Value based buying is holding it up but the momentum based crowd is absent on the buy side. The result - sideways trade above support near 255 until or unless that gives way or the index pushes past the top of the gap just above 300.
By the way, the HUI to Gold ratio continues to drop.
One thing I am noting today is that the Gold Volatility Index is moving higher again. It had been falling as gold was moving higher reflecting the lack of concern about further price weakness of any sharp degree. With price having regained a very large portion of the overall price decline since key support at $1525 gave way, it looks as if there is some nervousness building on the part of players about some potential for some more downside. We'll see if that is correct or not.
My argument back then was and still remains the same today - there is no enthusiasm to chase prices higher at the Comex gold market. That is indicated by the falloff in volume as price has moved higher. See the chart below....
In other words, this is more of a case of traders covering short positions out of fears popping up over bona fide reports of incredibly strong buying of physical gold than it is over a new found bullish enthusiasm on the part of the hedge fund/investment community.
Yesterday, the return of RISK ON trades came on the heels of the rotten economic data out of the Euro Zone. Once again we are in a situation where for the equity perma bulls, it is "Head's, I win; Tail's, you lose". The news was so bad that traders just knew it in their bones that ECB President Draghi is going to announce an interest rate cut next week. That of course is just what the equity bulls ordered.
Today however was a different case with the moribund GDP reading here in the US serving to remind us all that in spite of all of this reckless Central Bank liquidity creation, we are barely managing to limp along at the bottom when it comes to economic growth. Copper obviously wanted no part of this news today as it appears the short covering rally in that base metal might have come to an end also.
With the yield on the Ten Year Treasury note dipping back to 1.66% and with the 30 Treasury bond futures up nearly a full point today (not to mention the regularly recurring stupidity trade of buying the Yen as a safe haven), it is evident that whatever risk traders were willing to put on yesterday, they are taking it off today.
When it comes to gold here is the situation as I see it (nothing has changed in this regards but I want to restate it again) - Physical demand for gold is very, very strong; however, it is very, very strong at REDUCED PRICE LEVELS. Gold went on a fire sale last week and buyers jumped all over it. After all, a $200 drop in the matter of a couple of days is enough to get the attention of anyone wishing to acquire a metal that had a handle of "15" in front of it and then suddenly had one of "13". This has served to put a solid floor of support beneath the market and I believe a bottom that should hold if prices were to move back down towards that level in the near future for any reason.
The problem that I see is the same; while this sort of demand can bottom a market it CANNOT TAKE IT SHARPLY HIGHER without INVESTOR DEMAND from the hedge funds. Why? Because buying of physical is price conscious. People buy the stuff because it is so cheap. When it jumps back up too sharply, that kind of buying dissipates. What is then needed to take the price higher is the kind of mindless buying by hedge fund algorithms which have no conception of value whatsoever but are programmed to only chase motion.
Value based buyers acquire the metal when they perceive it to be cheap or underpriced. Hedge funds buy the metal when it keeps getting more and more expensive. Their buying kicks in when the value based buying eases off. Until the hedgies come in, what will happen is that price will move up to the point where the demand from the value based crowd gets choked off and loses some of its force.
The result is a market that has bottomed out but needs a shift in sentiment among the hot money crowd. With today's anemic GDP number, none of them are the least bit worried about inflation right now. Any doubts about that can be seen in the bond market price action as noted above.
The bulls did manage to take price through $1440, a level which earlier this week was attracting selling. When they then pushed it through $1450, traders who had sold against that level covered and that took it to $1470, another area that I was watching. Asian demand for the metal enabled buyers to take it another notch higher but as it moved into the mid morning of the Western session, the buyer just dissipated and short term oriented traders took that as a signal to close out some nicely profitable long positions recently established.
Notice how the volume LEAPS as the price drops. That is both long liquidation from day traders/short term guys and fresh shorting. The price action in the HUI, confirms that.
What we want to watch now is how gold acts as it nears the $1440 level. That level was serving as un upside barrier earlier this week and now reverses polarity and becomes a level of chart support. If gold can hold above this level, and so far it is, it will give bulls some confidence to wade back in and will make a few of those brand new shorts reluctant to push their positions. We would then expect to see the metal move back higher and take another shot at resistance. I would want to watch both the volume and the price action were that to occur to see if this thing has a shot at $1500. Remember, it is still an intermediate term bear market in gold so until the technicals change, strength will be sold unless we get a violation of resistance and a shift in the momentum of this market.
Did anyone notice how the miners faded well off their highs late in the session yesterday even as the rest of the equity world was celebrating another back slapping day of further giddiness. That was another clue that the euphoria in gold was about to hit a temporary wall.
The HUI managed to claw its way back into the technically significant gap region I have previously noted, but as expected, it could not CLOSE THROUGH the GAP to end out the week. That must occur for this to kick up another leg higher. It did manage to close in the gap yesterday but the manner in which it faded out towards the end of the session forebode further downside today.
What does this translate to in terms of the gold shares from a technical perspective as a result? Same as gold - the market posture is decidedly bearish but it does appears as if a bottom is in. The sector is lacking a strong upside catalyst however at the present time. Value based buying is holding it up but the momentum based crowd is absent on the buy side. The result - sideways trade above support near 255 until or unless that gives way or the index pushes past the top of the gap just above 300.
By the way, the HUI to Gold ratio continues to drop.
One thing I am noting today is that the Gold Volatility Index is moving higher again. It had been falling as gold was moving higher reflecting the lack of concern about further price weakness of any sharp degree. With price having regained a very large portion of the overall price decline since key support at $1525 gave way, it looks as if there is some nervousness building on the part of players about some potential for some more downside. We'll see if that is correct or not.
Wednesday, April 24, 2013
HUI Showing some Signs of Stability
The mining shares are attracting value-based buying which is providing some signs of stability in this beaten-down sector. As mentioned many times on this site, it will require far more than value-based buying to take this sector strongly higher. For that to occur, it requires momentum based traders.
Just take a look at the broader equity markets and you can see what happens when these momentum buyers decide to chase prices higher.
While we might have stem the downside in the mining shares, this sector needs to prove itself technically in order to give some potential buyers the confidence that this is just not a pause before a new leg lower.
For that to occur, buyers will have to show enough conviction to take the index into the gap region shown on the price chart. They will not only need to spike it into that gap, but hold it there on a close for a bare minimum. If they can do that, it should give some bears second thoughts about hanging around excessively long and overstaying some successful trades in the mining sector.
A CLOSE above the top of the gap, near the 300 level, should bring in some momentum based buyers as it will induce some additional short covering.
I want to continue to reiterate the necessity of these mining shares to improve their technical chart pattern before the gold market can sustain any sort of extended move higher. The shares led the metal lower and more than likely they will lead the turn in the metal higher. I would also suggest monitoring holdings in the ETF, GLD, to see if investors are returning to gold.
Moving over to gold itself, I am detailing a 2 hour chart as it establishes some areas of technical interest for us. After the wild volatility of last week, we are finally seeing some signs of a market that is settling down and beginning to act in a more "civilized" fashion. By that I mean it is not swinging all over the place.
Along that line, the Gold Volatility Index, has been dropping also. It is currently trading near 21.80 after having spiked as high as 35. That confirms that the recent bout of volatility (emotional duress) is behind us for the time being.
Back to the chart - what concerns me about gold is that the strong physical demand has been able to spook some bears (Goldman cancelled its sell recommendation) but has not yet been enough to bring back those investment types that were flooding into the gold ETFs around the world and the mining shares.
The other question I have is whether or not this physical demand is going to keep up its torrid pace if prices continue to drift higher. Gold under $1400 was certainly cheap but will buyers around the globe see it that way if it climbs back towards $1470 or higher? That remains unclear.
What I believe is the more likely outcome of this is that a floor has been established in the gold market below $1390 but there is not enough investor type demand from large players to drive the market sharply higher. The outcome then is most likely a period of range bound trading with both sides looking to either sell rallies or buy dips depending on their bias towards the market.
Right now, the top of the range is near $1440. Selling is entering near this level and bullish enthusiasm is fading as the market moves higher based on the shrinking volume. With volume low, bears feel confident selling against this level since they have some wiggle room to play with the $1450 psychological level as a mental stop out point. That is a relatively favorable trade in their minds since the risk is small compared to the potential for a drift back towards $1400 and perhaps lower.
Bulls on the other hand will more than likely feel comfortable buying in near those same levels figuring that physical demand will be their ally. They do need to take the price through $1440 very soon or they are going to face some desertion in their army from the shorter term oriented day traders and scalpers.
As far as today goes, the strong pop in crude oil that has taken it above the $90 mark, along with a bit of strength across the commodity sector, most notably copper, is giving gold a boost, especially with a bit of weakness being seen in the US Dollar.
It is going to be very interesting to see if the Asian demand that we have been seeing overnight continues this evening. It cannot let up if the market is going to hold its gains especially with equities continuing their one way trip north. Blue Horseshoe apparently still loves equities and until he stops loving them, a great deal of that $85 billion from the Fed this and every month, along with that $74 - $76 billion from the Bank of Japan, is going to end up in equities instead of gold.
Just take a look at the broader equity markets and you can see what happens when these momentum buyers decide to chase prices higher.
While we might have stem the downside in the mining shares, this sector needs to prove itself technically in order to give some potential buyers the confidence that this is just not a pause before a new leg lower.
For that to occur, buyers will have to show enough conviction to take the index into the gap region shown on the price chart. They will not only need to spike it into that gap, but hold it there on a close for a bare minimum. If they can do that, it should give some bears second thoughts about hanging around excessively long and overstaying some successful trades in the mining sector.
A CLOSE above the top of the gap, near the 300 level, should bring in some momentum based buyers as it will induce some additional short covering.
I want to continue to reiterate the necessity of these mining shares to improve their technical chart pattern before the gold market can sustain any sort of extended move higher. The shares led the metal lower and more than likely they will lead the turn in the metal higher. I would also suggest monitoring holdings in the ETF, GLD, to see if investors are returning to gold.
Moving over to gold itself, I am detailing a 2 hour chart as it establishes some areas of technical interest for us. After the wild volatility of last week, we are finally seeing some signs of a market that is settling down and beginning to act in a more "civilized" fashion. By that I mean it is not swinging all over the place.
Along that line, the Gold Volatility Index, has been dropping also. It is currently trading near 21.80 after having spiked as high as 35. That confirms that the recent bout of volatility (emotional duress) is behind us for the time being.
Back to the chart - what concerns me about gold is that the strong physical demand has been able to spook some bears (Goldman cancelled its sell recommendation) but has not yet been enough to bring back those investment types that were flooding into the gold ETFs around the world and the mining shares.
The other question I have is whether or not this physical demand is going to keep up its torrid pace if prices continue to drift higher. Gold under $1400 was certainly cheap but will buyers around the globe see it that way if it climbs back towards $1470 or higher? That remains unclear.
What I believe is the more likely outcome of this is that a floor has been established in the gold market below $1390 but there is not enough investor type demand from large players to drive the market sharply higher. The outcome then is most likely a period of range bound trading with both sides looking to either sell rallies or buy dips depending on their bias towards the market.
Right now, the top of the range is near $1440. Selling is entering near this level and bullish enthusiasm is fading as the market moves higher based on the shrinking volume. With volume low, bears feel confident selling against this level since they have some wiggle room to play with the $1450 psychological level as a mental stop out point. That is a relatively favorable trade in their minds since the risk is small compared to the potential for a drift back towards $1400 and perhaps lower.
Bulls on the other hand will more than likely feel comfortable buying in near those same levels figuring that physical demand will be their ally. They do need to take the price through $1440 very soon or they are going to face some desertion in their army from the shorter term oriented day traders and scalpers.
As far as today goes, the strong pop in crude oil that has taken it above the $90 mark, along with a bit of strength across the commodity sector, most notably copper, is giving gold a boost, especially with a bit of weakness being seen in the US Dollar.
It is going to be very interesting to see if the Asian demand that we have been seeing overnight continues this evening. It cannot let up if the market is going to hold its gains especially with equities continuing their one way trip north. Blue Horseshoe apparently still loves equities and until he stops loving them, a great deal of that $85 billion from the Fed this and every month, along with that $74 - $76 billion from the Bank of Japan, is going to end up in equities instead of gold.
Tuesday, April 23, 2013
US Mint Temporarily Suspends Sales of 1/10 ounce Gold Coins
Newswires today are reporting that the US Mint has temporarily suspended its sales of 1/10 ounce gold coins due to the surge in demand. Apparently there are insufficient supplies of the coins to meet current demand. A spokesperson for the mint says that they will resume sales as soon as the Mint can strike enough of the coins to replenish inventories.
Next to the one ounce coin coins, the 1/10 ounce gold coins are the second most popular coins bought by those desiring to own gold.
Next to the one ounce coin coins, the 1/10 ounce gold coins are the second most popular coins bought by those desiring to own gold.
Hacked Twitter Feed for AP sends Markets Careening
I view this incident as further evidence that the US equity markets are floating higher and higher on nothing but a bubble of air. Those who continue to chase stocks higher based on nothing but liquidity injections are playing a fool's game.
I look at today's one minute collapse in prices as a warning of what will happen to this market when all of these hedge funds who keep jamming these markets higher decide to stop buying. At some point, who in the hell are they going to sell to when the bell is rung???
Following is a 5 minute chart of the emini S&P 500 futures. If you happened to have gone to the bathroom just before the sharp selloff began, and came back and sat down in your chair in front of your quote screen, you would have seen prices pretty much right back where they were when you left. "Oh well, not much happening at this point" would have been your response. Boy howdy would you have been wrong.
Can you imagine how much money was lost today by traders on the long side of this market when those computers started selling and picked off every single downside sell stop?
Already you are hearing voices condemning the computers. Why is it that we only hear these voices when prices move sharply lower but the same voices are eerily silent while the same computers are busy buying everything in sight and shoving prices into the stratosphere? I only pose that question to point out the hypocrisy of those who seem to think that there is an ELEVENTH AMENDMENT to the US Constitution noting a God-given right to a permanently rising stock market.
My contention is that this madness we are witnessing in these markets, every single damned bit of it, can be attributed directly to the Fed and this incredibly stupidly short-sighted QE crap. A balance sheet of over $3 TRILLION and rising...
There is nothing fundamental behind this rise in stock prices - nothing - not when commodity prices continue moving lower and lower. Yet, someone keeps pushing it higher even as volume continues to shrink. This tells me that there is no sponsorship in this rally other than those who are AFRAID to SELL IT. That is leaving the air pocket overhead which can be hit by comparatively small buy programs.
Today, the reason cited for the move higher in the first place is that the news out of the Eurozone is so pathetic, that traders are just convinced Draghi is going to LOWER RATES and start their own version of the Fed and BOJ liquidity party. In other words, more funny money creation. This generation of stock investors/traders is collectively punch drunk.
Meanwhile, the markets bubble higher and higher - where they stop nobody knows. Place your bets ladies and gentlemen but you had damned well be first to pull the trigger on the sells if you expect to have much of anything left when this party stops. It is a TRADER's Market and not an INVESTOR's MARKET. Just remember that and you will be okay.
I look at today's one minute collapse in prices as a warning of what will happen to this market when all of these hedge funds who keep jamming these markets higher decide to stop buying. At some point, who in the hell are they going to sell to when the bell is rung???
Following is a 5 minute chart of the emini S&P 500 futures. If you happened to have gone to the bathroom just before the sharp selloff began, and came back and sat down in your chair in front of your quote screen, you would have seen prices pretty much right back where they were when you left. "Oh well, not much happening at this point" would have been your response. Boy howdy would you have been wrong.
Can you imagine how much money was lost today by traders on the long side of this market when those computers started selling and picked off every single downside sell stop?
Already you are hearing voices condemning the computers. Why is it that we only hear these voices when prices move sharply lower but the same voices are eerily silent while the same computers are busy buying everything in sight and shoving prices into the stratosphere? I only pose that question to point out the hypocrisy of those who seem to think that there is an ELEVENTH AMENDMENT to the US Constitution noting a God-given right to a permanently rising stock market.
My contention is that this madness we are witnessing in these markets, every single damned bit of it, can be attributed directly to the Fed and this incredibly stupidly short-sighted QE crap. A balance sheet of over $3 TRILLION and rising...
There is nothing fundamental behind this rise in stock prices - nothing - not when commodity prices continue moving lower and lower. Yet, someone keeps pushing it higher even as volume continues to shrink. This tells me that there is no sponsorship in this rally other than those who are AFRAID to SELL IT. That is leaving the air pocket overhead which can be hit by comparatively small buy programs.
Today, the reason cited for the move higher in the first place is that the news out of the Eurozone is so pathetic, that traders are just convinced Draghi is going to LOWER RATES and start their own version of the Fed and BOJ liquidity party. In other words, more funny money creation. This generation of stock investors/traders is collectively punch drunk.
Meanwhile, the markets bubble higher and higher - where they stop nobody knows. Place your bets ladies and gentlemen but you had damned well be first to pull the trigger on the sells if you expect to have much of anything left when this party stops. It is a TRADER's Market and not an INVESTOR's MARKET. Just remember that and you will be okay.
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.
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.
Trader Dan Interviewed on King World News Markets and Metals Wrap
Please click on the following link to listen in to my regular weekly radio interview with Eric King over at the KWN Metals Wrap.
http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2013/4/20_KWN_Weekly_Metals_Wrap.html
http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2013/4/20_KWN_Weekly_Metals_Wrap.html
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