Gold and Dollar Market Summary Author: Dan Norcini
I mentioned last week that I would be eagerly awaiting today’s release of the Commitment of Traders data so that we might perhaps get a better look at what is happening inside the gold and silver markets. You might want to reference the charts as you look this over.
Let me start with gold first. There was a very significant drop in the outright fund long position of nearly 10,000 contracts from Wednesday of last week thru Tuesday of this week. Alongside of this, there was also an increase of nearly 4,000 brand new short positions by that same fund category. The combination resulted in a sizeable drop in the fund net long position of 13,583 contracts to be exact.
Among the commercial category of traders, we witnessed a drop in that category of longs of just about 3,800 contracts while the short category (the bullion banks) covered a rather noteworthy 16,000 contracts. That nets out to a reduction of 12,166 in their net short position. On the surface that appears to be out of the ordinary but a closer comparison of price movement and open interest data suggests that the bulk of those covered shorts occurred on Tuesday of this week when gold had that heart stopping $32 swing in price from a high of $990 to a session low of $958. Anyone who was trading the market that day will soon remember that one!
It is important for analytical purposes to note that from the close of Tuesday last week at $948.90 in April Gold, that contract moved to a high of $990.30 on Tuesday of this week, a gain of a bit better than $41 at one point. That is the period over which the COT data is collected.
Tuesday of this week gold was rocked by huge selling which knocked it down that $32 off the intraday peak all the way down to a session low of $958.30. That is a mere $9.40 gain from the previous Tuesday close when all is said and done. It spent 4 days moving higher and on the fifth day notches a further upside move producing a gain of $41 from Tuesday to Tuesday only to have all but $9.00 of that move wiped out in a single trading session! Many if not a majority portion of the buyers from Wednesday of last week thru this week’s Tuesday session were no doubt stopped out after a price plunge of that extent. In watching the actual market trade during the day, I noted the swiftness at which the market collapsed could only be attributed to determined selling resistance at the topside which engendered long liquidation that soon snowballed into downside stop selling and broad based liquidation among speculators and commercials. That can be verified by examining the daily Open Interest data which showed a contraction of over 6,000 contracts in the Tuesday session. It was evident that some powerful entity was continuing to resist the upward price movement even in the face of determined speculative buying which was fundamentally based. Enter the commercial shorts who were selling at the peak just beneath $1,000 hoping to produce the downside plunge. They got their wish on Tuesday and then used that downside plunge to cover some of, if not all of those brand new shorts plus some more for good measure.
The point in all this is to detail that we are no where yet near to seeing a commercial signal failure in the gold market as much as some of us would dearly love to see one occur. After all, it could not happen to a more deserving group of folks as far as many of us are concerned. Nonetheless, they are still with us and are still opposing the price rise in gold as could once again clearly be seen from today’s nauseating price action in gold which was stuffed even as the dollar embarked on a further descent into the nether regions of obscurity. During a commercial signal failure, one does not see determined selling taking place on the part of some entity attempting to hold down price. What they see instead is panic buying by trapped shorts who are furiously buying, not selling, on the way up. Examine again that price chart I sent up last week of Minneapolis Wheat for an example.
Let’s face it – this same cartel that has resisted the rise in price of gold from $250 to now nearly $1,000 is going to be with us for a while longer yet. After all, the reason for commercial signal failures is that paper losses on losing short positions become unsustainable. This gang has had massive paper losses on their shorts for so long that I can no longer keep track of them nor do I care at this point in the game. Yes, they have managed to make back some of those losses during periods in which they precipitated severe downdrafts in the gold price but all in all, theirs has been a losing proposition in gold if you only consider what they have going on at the Comex. Rest assured, these people are using other avenues in gold to profit as they are not stupid.
Look, as far as the exchanges go, losing positions need to meet margin calls daily regardless of whether those positions are held by speculators or hedgers. In order to guarantee the integrity of the futures markets, Clearinghouses demand all margin calls be met that day or the very next morning no matter by whom they are owed. The paper losses of the commercial shorts in gold have been so far under water that they no doubt have had to meet many a margin call, but amazingly enough, it never seems to be an obstacle that prevents them from continuing to hold the positions or even increasing them. When one considers the plight of many commercial hedgers in the grain industry and the horrendously difficult time they are having in attempting to meet margin calls on hedged grain positions due to tightness in the credit markets and the unwillingness of many banks to further extend them credit to cover paper losses incurred by hedged positions which are underwater, I find it most odd to see these commercial gold shorts continuing to blithely coast through life with nary a care in the world when it comes to continuing to carry these losing paper short gold positions. Where is all that money coming from to cover the margin calls?
One would think that under normal circumstances a phone call would be made from the COO or the CFO demanding that the losses be cut in order to keep the company from facing severe financial distress. After all, how many firms have we been seeing of late that are running into major difficulties because their traders somehow managed to skirt company safeguards and stuck the firms with huge paper losses. That same Minneapolis Wheat market just recently brought about a huge forced selling event by some trader that managed to stick the company with millions of dollars of losses in the wheat market. A firm that does not exercise control over its trading arm and lets it incur paper loss after paper loss is asking for a whirlwind of trouble. Yet at the risk of beating a dead horse, the commercial gold shorts seem to never experience any such difficulties. Don’t you find that odd?