HOUSTON -- Large, well-funded traders classed by the Commodities Futures Trading Commission (CFTC) as “commercial” piled on the short side of gold this past week according to CFTC commitments of traders reports (COT) released Friday, August 7.
It is clear as crystal that the largest of the largest sellers, short sellers and hedgers were willing to take on all long comers this past week. Indeed those futures trading veterans were so motivated on the short side; they were so certain of their gold net short positioning as gold probed the $970s that they increased their net short positioning over four times the nominal increase in the open interest (details below).
At this level we must raise the caution flags once again, but that caution extends to both bulls and bears alike. While an extremely high COMEX commercial net short position is usually bearish in and of itself, at the same time that short positioning could be dangerous to the holders of it should gold ignore it and continue higher. Those positioned heavily on the short side are probably praying there won’t be any unforeseen exogenous events anytime soon.
We intend to focus this particular report specifically on the large commercial trader’s positioning in gold, and to a lesser extent silver.
Interestingly, if the data is accurate, the increase in the collective commercial net short positioning was not attributable to reporting U.S. banks, which already held large net short positions. In fact, the much maligned and widely discussed banks’ net short positioning in gold not only declined in size, but the number of U.S. banks reporting positions in gold futures also fell this reporting week.
More about the COT report below, but first, let’s look at the U.S. bank positioning in COMEX futures as reported to the CFTC.
U.S. bank positioning
Each month the CFTC publishes its Bank Participation in the Futures and Options Markets Report, which shows the positioning of reporting banks in the U.S. futures markets for commodities, including gold and silver.
The most recent report was for bank positioning as of August 4, also released on Friday. As of that report the number of U.S. banks reporting fell from three to two in gold.
The two remaining U.S. banks with reportable futures positions held a total of 346 COMEX contracts long gold and a total of 106,282 contracts short gold for a total net short position of 105,936 COMEX 100-ounce contracts. That with the total open interest of 392,834 contracts open and gold closing on the cash market at $967.08. A net short futures position benefits if prices fall, but could theoretically be offsetting transactions to opposite positions in other markets.
For comparison, as of July 7 the prior month, three reporting U.S. banks held a net short position of 116,457 gold contracts, while all commercial traders as a group reported 191,307 gold contracts net short, with gold then at $924.65 and a total open interest then of 372,985.
Over the past month we can at least observe that as gold rose $42.43, or 4.6%, from $924.65 to $967.08 the nominal amount of net short positioning reported by U.S. banks declined 10,521 contracts, or 9%.
During the same period the total combined collective commercial net short positioning (from all traders classed as commercial) rose 36,886 contracts, or 19.3%, from 191,307 to a very high 228,193 contracts net short (as detailed below in the Gold COT section). Measured as a percentage of all commercial net short positions, the two remaining U.S. banks’ positions fell from almost 61% to less than 47% in one month with gold on a rise as shown in the chart below.
So, while COMEX commercials as a group were getting shorter of gold, the U.S. banks were doing the opposite and there is now one less of the banks reporting a net short position in gold.
If the data is to be believed, we cannot attribute the one-week spike higher in commercial net short gold positions (detailed below) to the reporting U.S. banks, but rather to COMEX commercial traders in general. More about that in a moment, but first let’s look at the same data for silver.
U.S. banks in silver futures
As of August 4, exactly two U.S. banks reported holding 15 contracts long silver and 29,813 contracts short silver for a total net short position of 29,798 COMEX 5,000-ounce contracts -- with the total open interest of 99,477 contracts open and silver closing on the cash market at $14.62.
For comparison, as of July 7 the prior month, two reporting U.S. banks held a net short position of 31,880 silver contracts while all commercial traders as a group reported 37,432 contracts net short, with silver then at $13.13 and a total open interest then of 100,376 contracts open.
As silver rose $1.49, or 11.3%, for the month, the two reporting U.S. banks’ net short positioning actually fell by 2,082, or 6.5%. The total commercial net short positioning inched higher 1,609 contracts, from 37,432 to 39,041 contracts for the one-month period.
All commercial traders as a group held a net short silver futures position of 39,041 contracts as of last Tuesday (as detailed below in the Silver COT section), so the U.S. banks’ percentage of the total commercial net short positioning stood at 76.3%. While still obscenely high, that is actually slightly less than the previous month.
Thus, last month the two banks represented 85.2% of all commercial net short positions versus this month at 76.3%.
What’s the point? The point is that as silver rose significantly the net short positioning of the U.S. banks didn’t really change very much, but what little change there was showed the banks with less, not more net short positioning in silver. That runs counter to some commentator’s expectations and claims.
Moving on briefly to some of the other indicators.
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Gold ETFs: As gold metal edged a net $1.55, or 0.2%, higher for the week (to $955.67 on the cash market), SPDR Gold Shares (GLD), realized a net weekly reduction of 13.74 tonnes to show 1,072.87 tonnes of gold bars held by a custodian in London.
There appears to be some rotation from GLD to other gold ETFs. For example, while we saw a reduction in gold holdings from GLD, Barclay’s (soon to be BlackRock’s) iShares COMEX Gold Trust (IAU), reported an addition of 1.2 tonnes, to 73.47 tonnes of gold held in COMEX warehouses.
Silver ETF: Barclay’s (also for now, and soon to be BlackRock’s) sponsored iShares Silver Trust (SLV), reported a small, 3.47-tonne maintenance reduction to show 8,824.67 tonnes of average 1,000-ounce allocated silver bar inventory the prior week.
While we have to note a continued negative money flow from the largest gold ETF, apparently buying and selling pressure for the silver ETF has been more or less balanced over the past week, otherwise the prospectus says we would have seen material changes to the metal holdings and number of tradable shares.
Gold recorded a much higher weekly low ($951.30 Tuesday) and a significantly higher high ($971.62 Thursday), but surprise news out of the U.K., which upped their quantitative easing program, gave the dollar faux support enough to derail gold bulls on Friday. After looking for all intents like an old fashioned short beater most of the week, gold couldn’t sustain a rally. The last print on Friday showed $955.67 on the cash market, much closer to the low for the week than the high. For the week, the yellow metal booked a teeny net gain of $1.55, or 0.2%.
Please see the gold charts below for more technical commentary.
Having managed to overtake the $14 and 50-day moving average potential resistance levels, silver fared better, turning in a solid net advance of 47 cents, or 5%, but not before a Thursday after-hours attempt to sell it down was rudely reversed. Both the weekly high ($15.04 Thursday) and low ($13.89 Monday) were a fair amount higher week on week and silver managed to close a little closer to its high than its low on the week. A similar, but weaker sell-down attempt on Friday did manage to cause a last trade Friday of $14.62. Please see the silver charts below for more technical commentary.
The U.S. dollar caught a bid when the Bank of England quantitative easing news pounded the pound and bolstered the buck. Now we know why the greenback saw uncommonly strong support earlier in the week in the (index) 77.60s. The DXY leaped higher Friday, good enough that the DXY closed the week at 78.96, up 68 “ticks” from the prior week’s Friday close as shown in the U.S. dollar index graph below in the charts section.
As the DX fell another 115 basis points, from 78.88 to 77,73 COT reporting Tuesday to Tuesday, ICE commercial traders added 2,188 contracts to their collective net long positioning. The “ICECOMs” reported a net long position of 14,351 DXY contracts out of a total open interest of 28,621 contracts (LCNL:TO = 50%) as of August 4. Apparently the ICE commercials either “sniffed out” the favorable dollar news in advance, a little, or were rewarded by Devine providence. The U.S. dollar chart is below in the charts section.
After rising briefly above 72 a month ago, the Gold:Silver Ratio (GSR) continued its rather quick retreat, as expected, finishing the week at 65 and change. See the GSR chart below in the charts section.
Gold COT changes: COMEX commercials bombard gold. In the Tuesday 8/4 Commodities Futures Trading Commission (CFTC) commitments of traders report (COT) for gold metal, the COMEX large commercial’s (LCs) collective combined net short positioning (LCNS) blasted 25,672 contracts, or 12.7%, higher from 202,521 to 228,193 contracts net short Tuesday to Tuesday as U.S. dollar spot gold rose $29.63, or 3.2%, from $937.45 to $967.08, while the total open interest increased 6,044 to 392,384 contracts open.
The LCNS fell 1,705 contracts and the open interest fell 4,599 contracts the week prior.
Gold versus the commercial net short positions as of the Tuesday COT cutoff:
Source for data CFTC for COT, cash market for gold.
The chart above looks at just the nominal amount of commercial net short positioning. The chart below compares the COMEX commercial net short position for gold with the total open interest (LCNS:TO). That gives us a better idea of how the largest hedgers and short sellers are positioned relative to the rest of the COMEX traders.
The large, well-funded and presumably well-informed COMEX commercial traders were once again apparently very determined sellers as gold advanced toward the $970s. The commercials’ collective net short positioning actually increased more than four times the increase in the total open interest. As measured against all COMEX open contracts, the commercial net short position has now ballooned up to a dangerous 58.2% of all open contracts (LCNS:TO).
Source for data CFTC for COT, cash market for gold.
COMEX commercials are either very sure that gold will come down in price, or there has been an enormous amount of hedging in gold over the past week, or both. COMEX commercial traders are and have been aggressively selling gold at present.
As we have been saying, that does not necessarily mean the commercials are “right,” but it does mean that it will take uncommonly strong and consistent buying pressure in order for gold to advance higher toward what has become a “Great Wall of Gold,” a figurative barrier that the COMEX commercial traders, dominated by two U.S. banks, have erected in the path of gold’s historic advance. (See the two-year chart below in the charts section to see the Great Wall of Gold graphically.)
We continue to believe that given the very determined selling pressure currently, short-term traders on the long side really must adopt tighter, “near resistance” trailing stop strategies, but we caution that stops should not be set so close as to get nailed in ordinary weekly volatility.
Repeating from previous reports: “We fully expect that if gold does advance through the formidable resistance being thrown at it by the largest hedgers and short sellers now, and ultimately thrusts upward through the Great Wall of Gold, it will most likely do so in grand, explosive and historic style, sort of like it did when the $450 barrier gave way in 2005. We sure want to be on board if or when that day arrives.
Short-term traders should tighten stops now, but not too tight! With the action pausing, both buy stops and sell stops are ratcheting in toward the trading from both sides. We can expect volatility to increase in the near future, especially with lighter-than-normal summer liquidity. We also remain on guard for exogenous, surprise geopolitical events that could occur most anytime. We cannot be surprised to see a high percentage move in either direction under the circumstances.
With gold approaching an obvious area of resistance, and heightened uncertainty coming from industry regulators near term, we favor buying currently inexpensive, long dated (at least through December) well out-of-the money puts for both gold and silver ETFs as downside “insurance.” Together with a well managed trailing stop strategy, such money management techniques can improve one’s sleep regimen and stomach health, although it isn’t free. A qualified, experienced broker can advise clients on similar strategies for longer-term holders.”
Silver COT: As silver advanced a pleasing 90-cents, or 6.6%, COT reporting Tuesday to Tuesday (from $13.72 to $14.62 on the cash market), the large commercial COMEX silver traders (LCs) added a big 3,155 contracts, or 8.8%, to their collective net short positioning (LCNS) from 35,886 to 39,041 contracts of net short exposure. The LCNS also rose 2,685 contracts the prior week. The total open interest rose 1,716 contracts to 99,477 COMEX 5,000-ounce contracts open, after falling 508 contracts the week prior.
Source for base data CFTC for LCNS, London Silver Fix for silver from LBMA until 2-26-08 then cash market
For context, the chart below compares the silver LCNS to the total number of open contracts on the COMEX, division of NYMEX (LCNS:TO). That gives us a better idea of how the commercials are positioned relative to all the COMEX traders. When compared to all the contracts open, the commercial net short positioning in silver futures snapped up from 36.7% to 39.3%.
Source for base data CFTC for LCNS, London Silver Fix for silver from LBMA until 2-26-08 then cash market
While we have to take note that the silver LCNS increased materially, we also observe that the silver LCNS is significantly less unbalanced to the short side as gold.
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Summing up: It is quite clear that there is intense resistance for gold above $960 and we have to note the COMEX commercials aggressively selling and racking up near record net short positioning (as a percentage of the total open) as we moved into August. August is traditionally a weaker time of the annual cycle, so it is not unexpected to see it.
It is rare and usually bearish for the LCNS:TO to reach the 58% level. However, we remind everyone that it was in August of 2005, when we witnessed the LCNS:TO reach the stratospheric 58% level with gold then attempting to test the $450s. It was the week of August 16, 2005, in fact. The LCNS:TO was 58.3% that week with gold closing at $446.32.
By the next reporting week, August 23, 2005, the LCs held their collective net short ground. The LCNS:TO read an even higher 58.4% even after gold had fallen a little to $438.90. The figurative “wall” thrown up against gold then appeared to be holding, but that appearance was misleading.
One week later, the week of August 30, as gold merely edged lower to the low $430s, the COMEX commercials did the unexpected. In the course of just one week they covered or offset a huge 54,227 contracts and the LCNS:TO plunged from 58.4% to 47.8% in one report! That was with gold at $431.65.
By May of the next year, 2006, gold had advanced up to test the $730s for the first time in this gold bull, more than 60% higher than where it was when the LCNS:TO first reached 58% the prior August.
So, when we say that it is usually bearish to see the LCNS:TO so high, we can also point to and attempt to understand the periods where that huge selling by the commercials turned out to be “wrong.” Indeed, if gold is ever to gain a foothold above the Great Wall of Gold it will likely be during a period when it looks very heavily defended. Sort of like it did in 2005.
We have to note some additional negative money flow from the largest gold ETF and that argues against the bullish case very short term.
We remain on the hunt for special situations and “vulture opportunities” via “stink bids” for obvious lack-of-liquidity, non-news-related, over-reaction sell-downs on the miners on our Vulture Bargain Hunter list. Companies we believe have been sold down too far with longer-term high-percentage recovery possibilities, like the candidates Brien Lundin mentioned in the most recent Gold Newsletter.
While we must raise short-term trading stops on gold to a “near resistance level” and while we must sound the klaxon and raise the “caution flags” given extremely high, very determined gold selling and hedging by the largest of the largest gold futures actors, we urge caution equally to both gold bulls and gold bears. Although gold may indeed fall in price, it will have to do so without our being short of it. Indeed we do not think it advisable to sell gold short (at least yet) in U.S. dollar terms (or in any other currency for that matter).
This is a gold bull market until proven otherwise. In a bull market speculators have but two possible positions: Long or on the sidelines. Definitely not short, except to hedge. (At least just yet.)
We firmly believe that if gold is to punch through the Great Wall of Gold it will likely be despite activity in the U.S. dollar, or rather, regardless of it. It will also be when gold makes another advance in all global fiat currencies at the same time as it did in 2005.
Gold may or may not be ready to make that next advance. No one can see the future and no one “knows” when such an advance will occur in advance. However, given the actions of the current “captain” and “crew” American voters saw fit to elect to run this badly leaking national flagship, it would not be all that surprising if the world (especially Asia) suddenly wanted a lot more gold metal and a lot fewer of our paper promises in the weeks and months ahead.
Leave it to Richard Daughty, a.k.a. “The Mogambo Guru,” (TMG - everyone’s favorite satirist) to “nutshell” an issue as he did this past week.
TMG writes: “The truth is that everyone is a victim of the abject stupidity of government morons like Congressman Rangel, who happily voted to deficit-spend monstrous amounts of money year after year after year, plus pledging a hundred trillion dollars in future benefits, and encouraged the Federal Reserve to create massive amounts of excess money and credit so that people could go into crushing debt by borrowing Too Much Money (TMM) to buy, among other things, the gobs of new government debt, all of which cemented into place a bloated, dysfunctional, corrupt, government-centric economy! Hahaha! We’re freaking doomed!”
On another note, a new central bank gold agreement (CBGA) was reached this past week, limiting gold sales from the signatory large banks to no more than 400 tonnes per year over the next five years. Conflicting news reports were initially confused whether the 403 tonnes of gold expected to be sold by the International Monetary Fund (IMF) would be included under the new pact. However Reuters quoted an IMF official as saying the IMF gold sales would be conducted under the CBGA.
"We have committed as part of our new income model to have that gold sale, if done on the markets, to be done through the central bank sales mechanism," said Reza Moghadam, director of the IMF's Strategy, Policy and Review Department,” Reuters reported.
Finally, over the years I have tended to steer clear of political issues for the most part. Not because of apathy, but because it caused too much unproductive feedback. Having said that, some of you took issue with my comments on the religion of global warming in the most recent report. Out of clarity and compassion let me set the record straight. All religions, including global warming, have their zealous defenders and to them anyone who is a non-believer is a heretic.
I am old enough to remember when the vitally important issue of the day was “global cooling” because so much crap was being thrust up into the atmosphere the shade it would create would be like Carl Sagan’s “nuclear winter.” According to the scientists of the day (and it really wasn’t all that long ago) the very survival of the human species was threatened – by GLOBAL COOLING.
I am old enough to remember vividly when anything to do with nuclear power spawned mass protests from the radical anti-nuke left centered in Hollywood and New York. Nuclear power was vilified and its development retarded by well-meaning, but really quite stupid organizations and their cause-of-the-day “leadership.”
Now, less than a generation later, we see the same thing with global warming and nuclear power is now regarded as “green energy.”
You know, if I was in China, and I was trying to increase job opportunities in my country, then I would certainly support the idea of making it more costly to do things and more costly to make things in the United States via idiotic carbon taxes.
If I was in China and those unilateral U.S. carbon taxes ended up passing, understanding the competitive advantage they had just given my country I would first laugh out loud, but then send a quiet toast to the people in charge who sold their own people down the river to help China.
We are told that each week a new coal-fired power plant opens in China. The Chinese are laughing at carbon limits just like they laughed at our Treasury Secretary. If the U.S. expects to reduce carbon emissions solely on the backs of what is left of American industry (and consumers), then more industry will simply close up and move to China.
Why is it that more and more it seems like our own “leaders” are working for the Chinese government or OPEC instead of for America? Is it because they are laughing at us?
Americans have simply got to do a better job in the election department going forward. And no matter what your beliefs are on global cooling, thanks for reading this G. W. heretic.
Got Gold Report Charts
Below are few samples of the Got Gold Report (GGR) technical charts. Gold Newsletter subscribers enjoy access to all GGR charts and all the GGR reports, commentary and trading ideas.
That’s it from Houston, this week. Until next time, good luck, good trading and as always, MIND YOUR STOPS.
The above contains opinion and commentary of the author. Each person should study the issues carefully and, as always, make their own informed decisions. Disclosure: The author and/or his family currently holds a net long position in SPDR Gold Shares, net long iShares Silver Trust, net long natural gas ETF UNG, long San Juan Basin Royalty Trust (SJT), long Permian Basin Royalty Trust (PBT), long the following “Vulture Bargain Hunter Stocks” mentioned in this report or within the last three months: Timberline Resources (TLR), Paragon Minerals (PGR.V), Forum Uranium (FDC.V), Odyssey Resources (ODX.V), Radius Gold (RDU.V), Columbus Gold (CGT.V), Endeavour Financial (EDV.T), Terraco Gold (TEN.V), Bravo Venture (BVG.V), long SDS as a Big Market hedge and currently holds various (approximately 25) other long and short positions in mining and exploration companies. The author receives no compensation from any company mentioned in this report. To contact Gene use LLCCMAN (at) AOL (dotcom).
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