ATLANTA - We are still waiting patiently like good vultures for gold and silver to make it into our expected support zones. The longer it takes the more confidence we seem to garner for those support zones. We are eager to redeploy our short-term gold and silver ammunition, but we sure haven't missed all that much by not doing so since we were profitably stopped in May. Indeed, gold closed Friday, July 23, almost exactly where we were stopped May 20 and within about $25 above where we will feel compelled to reenter.
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.
We have some limited commentary on the just-passed Dodd-Frank Financial Reform Bill at the end of this offering, as well as commentary for those who actually think that tightening position limits will result in "improvement" in the futures markets.
Position limits by themselves are not, repeat not, the problem. It is exemptions to those limits which cause an unfair trading advantage for one side of the contest. Tightening position limits is tackling the wrong issue and will likely do a lot more harm than good.
First things first; let's make our usual probe into the COT report for this week. By the way, very soon now visitors will need a paid subscription to view our COT Flash reports, our full Got Gold Reports, and our Vulture Bargain Hunter offerings. To subscribe please see the link above and to the right. And thank you for honoring us with your support.
Gold COT
The Commodities Futures Trading Commission (CFTC) issued its weekly commitments of traders (COT) report at 15:30 ET Friday, July 23.. The report is for the close of trading as of Tuesday, July 20. (Please note, this report is being filed Saturday, July 24, but it may not be sent to subscribers until Sunday.)
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."
Gold fell $20.24 or 1.7% from $1,212.21 to $1,191.97 COT reporting Tues/Tues. As it fell Comex commercial traders decreased their combined collective net short positioning (LCNS) by a very large 32,684 contracts or 13.2% from 248,348 to 215,664 contracts net short. The Comex gold futures open interest fell by a much smaller 8,605 contracts (1.5%) from 568,078 to 559,473 contracts open.
Clearly the largest commercial traders are reducing their collective net short positioning at an accelerated pace. Not so clear are the reasons why.
Here's the nominal LCNS graph for gold futures (COT Graph1):
Source for data CFTC for COT, cash market for gold
Over the past three reporting weeks as gold corrected $48.53 or 3.9% from $1,240.50 to $1,191.97 the biggest "hedgers" and short sellers of gold have reduced their net short positioning by a remarkable 74,292 Comex 100-ounce contracts. That is a reduction in LCNS of 25.6% - a brisk pace.
Over that three-reporting week period for each $1 lower in spot gold the "Big Sellers" have covered or offset 1,531 contracts of their net short positioning. At just that pace, with no further acceleration factored in, the LCs would become net long gold in the $1,050 neighborhood.
Over the period the LCs have reduced their net short bets by contracts representing 7.4 million ounces - about 231 metric tonnes. As of June 29 (just under a month ago) the LCNS (the combined commercial net short positioning) showed the commercials had net paper commitments to deliver 28,995,600 ounces of gold. As of this July 20 report, they had reduced that to net commitments to deliver 21,566,400 ounces.
We can point to only three periods of faster reduction in the LCNS over a three-week period in the last seven years of data.
- Aug. 5-19, 2008 (as the world fell into the 2008 crash) with gold then in the $870s. The LCNS plunged from 219,671 to 130,154 contracts, a reduction of 89,517 contracts or 40.8%.
- July 5-19, 2005 with gold then in the $420s. The LCNS declined from 165,574 to 84,048 contracts, a drop of 81,526 contracts or 49.2%.
- May 3-17, 2005 with gold then in the $420s. The LCNS fell from 169,289 to 79,681 contracts, a 3-week drop of 89,608 contracts or 53%.
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.
When compared to all contracts open, the relative combined commercial net short positioning (LCNS:TO - the most important graph we track) fell sharply from 43.7% to 38.6% 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
Notice, once again that the LCNS dropped a good deal more than the open interest. (LCNS -32,684. O/I -8,605.) The LCNS fell faster than the open interest at a roughly 4:1 pace this reporting week. When we see that it suggests that the largest "paper gold" sellers are aggressively closing out their "hedging."
As gold sold down from the $1,260s to the $1,170s, please note that the LCNS:TO has fallen to its low of the year and this is the first time the LCNS:TO has fallen below 39% since December 9, 2008 during the 2008 panic.
The fact that the LCNS:TO has fallen so far on what is essentially only a modest, roughly 7% pullback for gold suggests a major shift is underway in the gold futures market. We view the current LCNS:TO of 38.6% as considerably more bullish than bearish. The largest commercial traders, as a group, seem to be rushing to cover or offset their net short positioning as gold consolidates in the $1,170s to $1,210s range.
We are anxious to learn if some of the changes in positioning are in response to the just-passed Financial Reform legislation, but we note that the effects of that legislation will take quite some time to implement. We suspect that some of the action can be attributed to "FinReg" but probably not much - yet.
Producer/Merchant... Commercials Reduce Gold Short Positions in Haste
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 four reporting weeks since then as gold fell roughly $50 from the $1,240s to the $1,190s the PMs have covered or offset 68,377 contracts or 30.7% of that position to show a still formidable but much lower 154,632 contracts net short.
Just below is the producer/merchant 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 falls, the blue line rises and vice versa.
The PMs reduced their net short positions by 26,115 contracts this reporting week alone. Two reporting weeks ago they reduced their net short positions by 27,974 contracts.
Swap Dealers Closing Out Shorts
The "other commercials," the large traders the CFTC classes as swap dealers, who had strongly increased their net short gold positioning four weeks ago to cap gold in the $1,260s, continued to decrease their collective net short positioning in this week's report. As of June 29 the swap dealers reported a net short position of a net 81,741 contracts net short. As of July 20 they had covered or offset 20,709 (25%) of that net short positioning, showing 61,032 contracts net short. (All figures net of spreading contracts.)
In other words, both classes of commercial traders have been reducing their net short positioning at what we consider a very fast pace over the past month.
Just below is the Swap Dealer no-spread net position graph (COT Graph 4).
Source CFTC for disaggregated trader data, Cash Market for gold
Gold really hasn't corrected all that much. If we use the $1,260s as the peak and the $1,170s as the low so far, that is only a decline of roughly $90 or about 7% in U.S. dollar terms. Yet, during that modest pullback for the yellow metal we are now witness to very large reductions in the commercial net short positioning - at least on the Comex.
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 have closed out a substantial amount of their collective net short positioning on what amounts to a net $50 drop in the gold price as measured on COT reporting Tuesdays. (We use the term "hedgers" loosely because the CFTC does.)
***
The above is an excerpt of the full Got Gold Report COT Flash update provided gratis to all this week. To continue reading as Gene turns next to the silver COT, Financial Reform commentary, position limits for futures markets 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. His more in-depth market reports, insights and trading ideas are available at www.GotGoldReport.com.
