Traders Cooperative

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Got Gold Report – COMEX Commercials Reducing Gold Net Short Positions

By Gene Arensberg
02 Dec 2007 at 03:25 PM

HOUSTON (ResourceInvestor.com) -- After marking a second, lower high in the $820s, a move higher that was not supported by most of the indicators this report follows closely, gold moved sharply lower into the lower $780s on the cash market, threatening to break key upper technical support levels. A break of upper support could turn a high level consolidation into a bona fide correction. Falling oil prices and a firmer U.S. dollar will get most of the blame, but more likely than not this down move for gold was just plain overdue.

Speculators who rule the roost at extremes are by nature short term traders and this current up leg for gold has become quite long in the tooth. As measured by this report, at 56 weeks in duration as of November 9, the current/recent up leg for gold has become the longest period of uninterrupted advance without at least a 10% correction since the Great Gold Bull began in 2001-2002. (Gold still hasn’t corrected more than 10% so it might actually be longer now. We’ll see.) For speculators 56 weeks is an eternity, so we can’t blame them for thinking there is no way that the up move can continue much longer, even if they end up being collectively wrong.

Mining Shares Signaled Weakness

One barometer that has been consistently negative over the past six weeks is persistent weakness in the junior mining sector. Even as gold and silver cut new bull to date highs and sentiment became modestly frothy, shares of lower echelon miners and explorers languished. That’s bearish and suggests large scale profit taking and a relative dearth of new wealth inflows into the sector.

Financiers and high risk money brokers, who are paid bonuses on their performance and need to raise funds for the next big play have been cashing in chips on their previous darlings. Tax loss selling, which actually has two peaks in late October and in early December has also taken its toll on the low-totem-pole issues. The good news? There are only 19 trading days left in 2007, so the vast majority of that downward pressure has already been expended.

As gold was air kissing its all time nominal high near $850 the action in mining shares suggested that new blood, new wealth in sufficient amounts to support higher prices was conspicuous in its absence. For evidence consider the Cash Gold Minus HUI indicator near the end of this report.

A Rising Tide

As gold and silver move higher in price the amount of wealth it takes to support those higher prices increases logarithmically, so, further advances are dependent on increasing global wealth inflows into the metals. As long term gold and silver investors we have to ask ourselves if we believe that more wealth will be entering the gold and silver markets than leaving going forward. Yes, it’s that simple. Over time will more money be chasing metal than increases in the amount of metal available?

It is this report’s view that given the current global state of affairs and the cast of characters which have been allowed to run the show, and with obviously strengthening trends now firmly in place, the long term answer has to be yes, wealth will flow into the metals faster than the industry can increase the available supply. From time to time much faster depending on global events and various crises.

Along the way there will be ebbs and flows in the sea of total global wealth seeking safe harbor in tangible hard assets, but the overall tide is most definitely rising. It’s up to us to take advantage of those ebbs in the flow of global liquidity to improve our own positioning ahead of the next flood of new wealth into real money.

Argument in the Indicators

If mining shares have been signaling lower gold prices, that argues with the signals being sent by some of the other indicators this report follows closely such as the positive money flow into the largest gold ETF over the past week (see the Gold ETF section below).

Perhaps more importantly, although the largest of the largest gold futures traders on the planet remain very strongly net short gold futures, they sure seem to be in a hurry to reduce that collective net short positioning lately. Traders classed by the CFTC as commercial have significantly reduced their net short positioning over the past three reporting weeks even with gold above $800 (see the details in the COT Changes section below).

Bottom line for this report is that we have to keep short term caution flags flying given the still large, but shrinking COMEX commercial net short positions and the lackluster performance of mining shares to the metals. However, it is this report’s contention that it is not too soon to begin bargain hunting opportunistically, especially in the already beaten up ultra-high-risk miners and explorers well down the mining share food chain and strong to very strong dips for the metals themselves should be bought in measured, incremental bites, ahead of the next tsunami of new wealth into precious metals.

On to some of the indicators.

COT Changes. In the Tuesday 11/27 commitments of traders report (COT) the COMEX large commercials (LCs) collective combined net short positions (LCNS) DECLINED 4,301 contracts or 2% from 209,625 to 205,324 contracts net short Tuesday to Tuesday as gold metal turned in a net GAIN of $8.38 or 1% from $803.70 to $812.08 on the cash market.

Since Tuesday gold sold down another $30.38 to $781.70 on the cash market, down $42.06 for the very volatile calendar week.

Over the past week total COMEX gold open interest inched higher 8,352 to 520,782 total open contracts, but that follows the big 40,116 contract reduction the week prior.

Long term December 2008 and beyond COMEX forwards added 3,136 contracts to 91,193 lots open, about 17.5% of open contracts. That is a little above average, but not enough to raise eyebrows and still no ultra-bearish big spike up in long term forwards.

What is sticking out of the COT data like neon billboard? Well, if gold is about to plunge even lower then why, when gold turned in a net $8 advance on COT reporting Tuesdays, did the largest of the largest gold futures traders (and hedgers) elect to reduce their collective net short positioning? That’s right, as gold advanced the COMEX commercial traders were getting out of net short positions this week.

Indeed, they have been reducing those net short positions for several weeks. Since the combined collective COMEX commercial net short position (LCNS) peaked at a record 240,009 contracts on Tuesday, November 11, with gold then at $825, the commercials have quietly pared down their net short exposure by 34,685 lots or 14.4% while gold itself dipped $12.92 or 1.6% (as measured on COT reporting Tuesdays).

If the commercials thought that gold had much more downside, shouldn’t they be increasing their net short positioning or at least standing pat as gold moves lower? Instead, over the past three COT reporting weeks those grizzled veteran futures traders got the heck out of net short positioning equal to a little over 107 tonnes of gold metal. Now that gold is $30 lower than Tuesday’s COT report (actually reported Friday 11/30), we can bet that the LCNS is even lower, maybe much lower, but we’ll have to wait for the next COT report to know for sure.

Although the action by the LCs suggests urgency in net short position reduction, (see the chart below) the LCNS remains at a very high level, so we’ll keep this indicator on the bearish side of the gold market indicator ledger short term. However, when COMEX commercial traders are reducing net short positions into gold strength that would not normally be regarded as particularly short term bearish. Let’s see if that continues given recent dollar strength.

Gold versus the commercial net short positions as of the Tuesday COT cutoff:


Source for data CFTC for COT, cash market for gold.

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