COT Flash Bottom line: COT report shows largest one-week reduction in large commercial net short positioning for gold since Aug. 12, 2008 (23 months) and the fifth largest gold LCNS reduction in our records since 2003. Gold was -3.9% and the gold LCNS -14.1%. Silver -3.6% and the silver LCNS -10.5%. This is more bullish than bearish. Details are below.
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ATLANTA - We came fairly close to reentering the gold trade with our short-term ammo this past week. We actually had several limit orders cued up not all that far from the trading on Wednesday. The idea at the time was simple. We were looking for the "second wave down" which so often occurs in aggressive gold market sell downs. Our initial "feeler" orders would have kicked in had gold been driven down another $25 or so. That was with gold probing the $1,180s.
Unfortunately (or fortunately for those already long), we counted a bit too much on past gold sell-down history this time only to see slightly more buying interest than selling with gold in the $1,180s. Gold hasn't continued lower, yet, but it also hasn't snapped back up to where it started in the $1,250s either.
We did look briefly at some long option ideas also, but the premiums seemed extra rich at the time, so we stuck to the original game plan of waiting for gold to come into our expected support zone, preferring to wait to see what the commitments of traders report would show us before refining our expected support targets. We will get to that in just a moment.
The net result is that we remain on the sidelines with our short-term gold-silver ammunition, but, as always, we remain thankful we hold physical metal in our longer-term arsenal.
With no further introduction, let's get right into this week's report.
Gold COT
The Commodities Futures Trading Commission (CFTC) issued its weekly commitments of traders (COT) report at 15:30 ET, Friday, July 9, 2010. The report is for the close of trading as of Tuesday, July 6. (Please note, this report is being filed Saturday, July 10, but due to technical issues it may not be sent to subscribers until Sunday.)
Remember that GotGoldReport.com is focused on the changes in positioning of the largest futures traders in that report - the traders the CFTC classes as "commercial," including the bullion banks, large dealers and swap dealers combined. We refer to those commercial traders as "LCs" for "large commercials."
As gold fell sharply $47.90 or 3.9% to $1,192.60, COT reporting Tues/Tues, Comex commercial traders decreased their combined collective net short positioning (LCNS) by a stunning 40,814 contracts or 14.1% from 289,956 to 249,142 contracts net short as the open interest fell by a smaller 23,406 contracts (3.9%) from a near record 601,138 to a still very high 577,732 contracts open.
This week's reduction in the large commercial net short positioning (LCNS) is the largest nominal one-week LCNS reduction since Aug. 12, 2008, when the LCNS then fell 43,104 contracts with gold then in the $813 arena. It is also the fifth largest one-week nominal reduction in our records going back to 2003.
The largest one-week nominal LCNS reduction in our records occurred with the Aug. 30, 2005 COT report as the LCs then covered or offset an enormous 54,224 contracts with gold then in the $430s.
Here's the nominal LCNS graph for gold futures (COT Graph1):
Source for data CFTC for COT, cash market for gold
We think it is interesting to point out that this week's fifth largest LCNS reduction in nominal terms was "only" 14.1% of the entire large commercial net short position. That 14.1% reduction is large, but there have been quite a few larger drops in the LCNS in percentage terms since 2005.
For just a couple of examples, consider the COT report from July 31, 2007. As gold fell $17.60 or 2.6% from $683.20 to $665.60 that COT week, the LCNS plunged 48,958 contracts from 161,602 to 112,644 contracts net short. That was an LCNS reduction of 30.3% in one week.
Looking farther back into the data, in the COT report for Jan. 11, 2005, as gold fell $5.16 or 1.2% from $427.08 to $421.92, the LCNS declined 35,405 contracts from 105,742 to 70,337 contracts net short - a reduction then of 33.5%.
The point is that this was a large drop in the LCNS, but certainly nowhere near a record drop in percentage terms.
We compare the nominal gold LCNS to the total open interest. That gives us a better idea of the relative positioning of the largest hedgers and short sellers - the producer/merchants and the swap dealers combined into a single category - on the Comex.
Notice, please, that the LCNS dropped a good deal more than the open interest. When we see that it suggests that the largest "paper gold" sellers are aggressively closing out their "hedging." When compared to all contracts open, the relative combined commercial net short positioning (LCNS:TO - the most important graph we track) fell sharply from 48.2% to 43.1% of all Comex contracts open.
Here's the LCNS:TO graph for gold (COT Graph 2):
Source for data CFTC for COT, cash market for gold
As gold sold down from the $1,260s to just the $1,180s, we have to note that the LCNS:TO has fallen to its low of the year. Indeed we have to go all the way back to Jan. 20, 2009 (immediately following the 2008 panic) to find an LCNS:TO lower than this week.
We view the current LCNS:TO of 43.1% as arguing more bullish than bearish. With gold in the $1,190s the largest commercial traders, as a group, seemed to have been in a rush to cover or offset their net short positioning so far in this July sell-down.
Consider that as all Comex traders, long and short, closed out 23,406 contracts of paper gold "action" the largest sellers of futures contracts reduced their net short bets by 40,814 contracts, 1.7 times (or 74% more than) the drop in open interest. That certainly sounds to us like a rush to the exits for paper gold short sellers.
Producer/Merchant
The producer/merchant commercials (PMs), the category in which we believe the largest bullion banks "live," reported an all time high net short position of 223,009 contracts in the June 22 COT report. In the two reporting weeks since then as gold fell roughly $50 from the $1,240s to the $1,190s the PMs have covered or offset 42,768 contracts or 19% of that position to show a still high but much lower 180,241 contracts net short.
The PMs reduced their net short positions by 27,974 contracts in this reporting week alone.
Just below is the producer/merchant (PM) positioning graph as of Tuesday, from the disaggregated COT data (COT Graph 3).
Source CFTC for disaggregated trader data, Cash Market for gold
Remember that the blue line in the graph above is expressed as a negative number, so when the commercial net short position rises, the blue line falls and vice versa.
The "other commercials," the large traders the CFTC classes as swap dealers, who had strongly increased their net short gold positioning two weeks ago to cap gold in the $1,260s, reversed course in this week's report. Whereas they had added 15,834 contracts to a total of 81,741 contracts net short in the prior COT report, in this report they reported holding 68,901 contracts net short. (All figures net of spreading contracts.)
In other words and simplistically speaking the swap dealers took advantage of the sell-down to cover or offset 12,840 contracts of the downside firepower they expended in capping gold two weeks ago.
Just below is the swap dealer no-spread net position graph (COT Graph 4).
Source CFTC for disaggregated trader data, Cash Market for gold
Clearly both classes of Comex commercial traders used the sell-down in gold to cover or offset a material amount of their net short positioning. The commercial traders remain stoutly net short gold, but we think it is important to note the velocity of their apparent short covering seems to suggest a sense of urgency on their part to exit short side bets. At least it does to us.
Roughly speaking, for each dollar of gold price decline, the largest gold "hedgers" and short sellers covered or offset about 900 Comex paper gold contracts. Isn't that kind of a brisk pace if they thought this was just the beginning of a gold correction?
Notice also, that both the PMs and the SDs net short positions declined sharply as opposed to the notion that they "hammered" the gold market with an avalanche of new short selling. Had that been the case, there would have been little or no reduction in the LCNS or it would have even increased.
Therefore as we see it this week, as gold dropped a fairly large amount the largest "hedgers" and short sellers used the drop to decrease their net short positioning by significant amounts which argues bullishly. The LCNS:TO is at its lowest reading of the year which also argues more bullishly than the opposite.
That doesn't necessarily mean that gold won't continue to sell off even more. It can and it might, but it certainly does mean that the largest "hedgers" and short sellers of paper gold closed out a big chunk of their collective net short positioning on a $50 drop in the gold price. (We use the term "hedgers" loosely because the CFTC does.)
What would have been a lot more bearish is if we had opened this latest COT report to find that both the PM commercials and the SD commercials had maintained or even increased their net short positioning with a $50 drop for gold. If that had been the case it would have meant the commercials had declared war on the gold price and mere traders like us needed to find the nearest foxhole to hide in.
Since they seem anxious to get smaller on the short side, we think that gold will be well bid on most any significant dip just ahead. Right or wrong, win or lose, it's looking like we are going to have to raise our estimate of where overwhelming support will show, up from the $1,150s to (we are not yet sure where, but perhaps to the $1,180s). However, our intention is to give the gold market one more week to get into our "wheelhouse," which is the expected zone of support shown in our linked tracking charts.
We have been patient this far; we haven't been harmed by that patience, and if there is a "second wave" down yet to come we'd sure like the opportunity to benefit from it for an improved entry standpoint.
We may, that's may, opt to "scale-in" with an entry this one time, as we are convinced that demand for both gold and silver will be increasing later this year as sovereign debt, municipal debt and state debt issues come back into focus once the lazy summer dog days are just memories. (We discuss "scaling in" at the end of this report.)
Just about anything is possible this year as the upcoming political bloodbath season goes into hyper-drive in late August in the U.S. We strongly suspect that there could also be some financial "earthquakes" yet to surface as one possible explanation for the relatively low LCNS:TO for gold.
Along those lines we think it is amusing that the Obama administration is now sending out its talking gnomes to attempt to counter the obvious - that there has never been a more anti-business administration than the current cast and crew in Washington. (With the possible exception of the Carter administration in the late 1970s.) Right! As if saying they are not anti-business will change anyone's minds at this point? The very real damage has already been done. It won't be un-done by a few twenty-something year old talking heads on cable TV.
Once we have worked through all the charts, ratios and data this weekend we do intend to update our findings in the linked charts near the bottom of last weekend's full Got Gold Report. Readers will find a link to that report, provided gratis to all this week, on the front page of the Got Gold Report web log at www.gotgoldreport.com.
The above is an excerpt of the full Got Gold Report - COT Flash update. To continue reading as Gene turns next to the silver COT and his conclusions please click on this link:
And thank you for doing so.
A land developer, professional numismatist, self-taught bullion trader and investor since 1980, Gene Arensberg analyzes technical and fundamental developments in the precious metals markets. In 2000 Gene started sharing his own market research with fellow traders and fund managers. Those email reports evolved into his popular Got Gold Report, a biweekly look at important indicators for gold and silver published on the web. Gene's more in-depth market reports, insights and trading ideas are available at www.GotGoldReport.com.
