By Grey Beard
By Grey Beard
By Grey Beard
[biiwii comment: From Back to Our Regularly Scheduled (de) Programming: “While there are some quality people out there writing and speaking about gold, others peddle simple answers for other people to consume. Their business is drama, not managing financial markets.” Saville’s post is both simple and undramatic. But that doesn’t sell as well, now does it?
In a typical commodity market the traders known as “commercials” are usually hedging their exposure to the physical commodity when they buy or sell futures contracts. For example, in the oil market the most important “commercials” include oil producers, who are naturally ‘long’ the physical commodity and often sell futures contracts to hedge this exposure, and manufacturers of oil-based products, who are effectively ‘short’ the physical commodity (by virtue of the fact that oil is one of their biggest costs) and often buy futures contracts to hedge this exposure. However, the gold market is different.
Some of the commercial traders operating in the gold market are traditional hedgers. Mining companies and jewellery manufacturers, for example. But given that the existing aboveground stock of gold dwarfs the annual supply of new gold and that the amount of gold that changes hands for store-of-value, investment and speculative purposes dwarfs the amount of gold bought/sold for more traditional commercial uses such as fashion jewellery and electronics, a reasonable and knowledgeable person would expect that traditional commercial traders would play a relatively small role in the gold market. A reasonable and knowledgeable person would be right.
In the gold market the dominant commercials are not traditional hedgers. They are also not speculators, in that they rarely take positions that rely on the gold price moving in a particular direction. They are spread traders, meaning that they make their profits by trading the differences in price between the physical and futures markets.
For example, if speculative buying of gold futures causes the futures price to rise relative to the spot price by a sufficient amount it will create an essentially risk-free arbitrage opportunity for a commercial to sell the futures and buy the physical, and if speculative selling of gold futures causes the futures price to fall relative to the spot price by a sufficient amount it will create an essentially risk-free arbitrage opportunity for a commercial to buy the futures and sell the physical. For another example, if gold buying by hoarders of physical gold causes the cash (physical) price to rise relative to the futures price by a sufficient amount it will create an essentially risk-free arbitrage opportunity for a commercial to sell the physical and buy the futures, and if the ‘dishoarding’ of physical gold causes the cash (physical) price to fall relative to the futures price by a sufficient amount it will create an essentially risk-free arbitrage opportunity for a commercial to buy the physical and sell the futures. In other words, commercial trading in the gold market is mostly about arbitrage.
The difference between commercial trading in the gold market and commercial trading in all other commodity markets is tied to gold’s long history as money. Strangely, many gold ‘experts’ assert that gold is different due to its dominant monetary and store-of-value roles, but then insist on applying a traditional commodity-style method of supply-demand analysis. Unsurprisingly, the result is a pile of hogwash.
The build up in gold and especially silver’s CoT commercial net short positions (and corresponding over bullishness by large and small specs) was troubling. So too was a meeting of interest rate manipulators last week (never goes well for Team Honest Money). Combine the two and the anticipated correction hit the gold sector.
A problem I have had is that it usually takes weeks to unwind a terrible CoT situation. Since my tin foil hat is in the shop for repairs I cannot chase around those that may or may not be manipulating gold and silver. I play it straight. But it sure did seem like a convenient buildup into the FOMC’s word play and tough guy act and sure enough, we had post-FOMC pukage in the metals and miners.
Now however, GDX has dropped to NFTRH’s target zone (14 to 14.50) in quick time. The only way CoT is going to have proved (come Friday) to have unwound the bearish alignment that quickly is if indeed gold and silver were purposefully gooned up in what we might call a focused and coordinated operation. i.e. wax on, wax right the hell off again.
Whatever, for now I covered my silver and gold miner shorts very profitably but am in no hurry to get bullish and add to my small group of ‘relative quality’ miners until I get a better read on the CoT situation. May even short again. Who knows? I am going to let the market tell me, not the other way around.
I understand that the miners can (and should) lead gold in a bullish phase. Here is the daily view of GDX-GLD looking pretty good.
And it had better look pretty good because the long-term (HUI-Gold) looks pretty horrific.
So maybe the miners are done with their correction and ready to lead the still struggling metals. Then again, maybe not. All I can tell you is that if the rally resumes (we have HUI 150’s open) this will have been the quickest smack down and recovery in recent memory. It would also be a ripple in the bear market’s character. It’s interesting to say the least.
A lot of nonsensical commentary gets written about the Commitments of Traders (COT) data for gold (and silver). The information in the COT reports can be used as an indicator of gold-market sentiment. Nothing more, nothing less. It cannot validly be used to support the theory that “commercial” traders (primarily bullion banks) have been conducting a long-term price-suppression scheme.
One of the most important points to understand with regard to the positioning of traders in the gold futures market is that the group known as speculators drives the short-term price trends. This is made apparent by the following chart, which was created by Saxo Bank and linked at the article posted HERE. The chart clearly shows that, with only a few minor discrepancies, over the past three years the net position of speculators in the COMEX futures market (the black line) has moved with the gold price (the red line). More specifically, it shows that speculators start adding to their collective net-long position at price lows and continue to add until the price makes a short-term top, at which point they become net sellers and their collective net-long position begins to decline. The process is self-reinforcing, in that a rising price prompts buying and a falling price prompts selling by the trend-followers within the speculating community. Note that a chart stretching back well beyond 2012 would show the same relationship.
The gold and silver Commitments of Traders data are out and what do you know, they improved again. Lot of good it has done precious metals investors thus far, but maybe next time people will take seriously those times when the goons are gathering short while at the same time the promoters are popping off about Ukraine, Chinese demand and Indian Wedding Season.
Yup, improved a gain. A lot of good it did precious metals bulls today, but we can bet that the goons covered shorts again today (data are only through Tuesday) and I would assume speculators continued to puke. Got to play the game folks, in the casino at least. This has nothing what so ever to do with real physical gold. Note the open interest on silver; that is in line with the power of today’s thumpage. A coming low in these metals should be very interesting. Click the graphics to de-minify them.
As expected, there was improvement this week in the gold and silver CoT data. Silver did not do much but it had been improving much more steadily than gold, which mysteriously (ha ha ha) took a sizable hit a week ago Thursday. This data includes that hit. The goons did some covering on that day. Click graphics for full view…
As the silver CoT report data systematically, almost robotically degraded into the September 2012 top (despite the seemingly bullish coming of QE3) NFTRH used to ask week after week “Who are those guys?” doing its best Butch Cassidy while evaluating the gathering short interest.
Below is the CoT graph from NFTRH 203 dated September 9, 2012. Week after week ‘those guys’ were ganging up on silver and we all know what soon happened; a harsh bear market down leg for the precious metals.