<<"Russell wrote:...the Commercials have taken a huge short position against gold. Do you follow the "Commercials"? I assume you do?>>
Yes I do. Many folks do. Many folks don't. And.......?
<<"Commercials" build their positions slooooowly and always have "right of way.">>
Maybe 'yes' and maybe 'no'! Giving your statement the benefit of the doubt, what conclusions should one draw from it?
I posted the following link a few days ago, and, right or wrong, the COT numbers, in themselves, fostered a considerable amount of theoretical analysis from some named Steve Williams, who is, imo, open minded enough to at least try to draw something meaningful from them. Color me 'cautious', but I tend to put more credence into statements that have some some basis of comparison than to a simple, in essence, "I don't follow the COT's....they don't mean sh*t!" form of dismissal. Not that you or any other naysayer used those exact words, mind you...<GG> Please take this time to read, if nothing else, the section that covers the COT #'s
A really excellent read on the PM's.
bolded emphasis mine.
Gold, Gold Stocks
Since the first of December 2002, the price trajectory on the chart has been at a much higher slope than previous rallies. This is "Wave 3" stuff. But wave 3 of what degree?
In the CFTC's Commitment of Traders report, as of 31 December 2002, Silver's commercial category is net-short 60,000 contracts (300 million ounces, 9375 tons) and gold commercial's are net-short 104,000 contracts (10.4 million ounces, 325 tons), not including options. The current open interest suggests that just over 60% of these contracts are for February delivery and 11% are for June, 2003. As the clock ticks forward in time as we approach contract expiration, many of these contracts will be rolled into the next most active month. Right now, roughly 62,000 net-short gold contracts (195 tons) are for February, 2003 contract month.
At last weeks high gold price, every single short gold contract was a loser. The notional values were $1.4 billion for silver and $3.6 billion for gold. As of 1/7/03 the total number of eligible ounces of gold for Comex delivery was only 344,000 ounces. Silver has 46 million ounces eligible for delivery. If you consider that only 5-10% of the contracts traded ever go to actual delivery, then perhaps only 5000-10,000 contracts of gold will be delivered. That means there are perhaps twice as many gold contracts likely to be called for delivery than are currently available to deliver with warehouse stocks.
If the warehouse stocks of gold does not change significantly between now and February, 2003 delivery, and if more than 3400 contracts of gold are taken to physical delivery, then the shorts are in deep doo-doo.There are only a few options available: buy physical gold from the spot market at prevailing prices, lease it (but pay it back later), reclassify inventory to make it eligible for delivery, or declare bankruptcy. Let's say a worst case scenario is that 10,000 contracts are called for delivery in February (1 million oz, 31 tons) and only 344,000 are available at the Comex... "Someone" will have to find 20 tons of gold. That much gold will cause spot prices to rise. 20 Tons is worth approximately $230 million.
That's not a very pretty picture. But please keep in mind that the futures exchange markets account for perhaps only 1/10th of the trading activity in the OTC markets. In the OTC, most contracts are settled in cash and since there is usually very little physical delivery involved, every OTC contract must be settled. In the futures exchange every contract is closed out, if not in physical delivery then the unrealized gain/loss is applied to the traders margin account (and is then turned into a "realized" gain/loss). Leading into the contract expiration timeframe, if the traders unrealized losses are excessive, the futures exchange will require the traders broker to issue a margin call and the trader will be required to post additional cash.
A rather low-accuracy, but highly illumunating tool is to track the week-to-week changes in account values between the various COT categories. To do this I created a spreadsheet of the historical COT information. Beginning in March, 2001 when Gold reached it's lowest weekly closing price, I tracked the performance of each category as follows: the weekly net change in longs times the net change in gold price minus the net change in shorts times the net change in gold price. This is acummulated from a starting account of $0 when the lowest price was made in March, 2001 through the most recent COT report data (12/31/2002). It shows that the Commercial category has a mark-to-market loss of $5.4 million, the Large Speculator as a gain of $3.9 million, and the Small Speculator a gain of $1.5 million.
Quite often, traders say that the Commercial category is usually right. To demonstrate this statement I have assembled the following charts using the historical COT data from 1986 through present:
Click chart to enlarge.
The top chart is the weekly closing price of gold. Chart 2 is the Commercial category - the top section (blue) is the percent of total open interest for the net long/short position - the bottom section is the actual net long (+) or net short (-) position. Chart 3 is the same chart but for the Large Speculator category. The labels match the same positions on each chart.
In the Commercial chart, there have been 4 times when their net short position was at an extreme level. This is verified by both the blue and red sections. The current Commercial net short position is the second most extreme in the COT history. In the Gold chart, the first 2 times (A & B) were almost immediately followed by lower prices. Point "C" was followed by lower prices, but only after a few weeks delay.
In the Large Speculator chart, there have been 5 times when their net long position was at an extreme level, 4 of which coincide with Commercial extreme net shorts.
Point "D" is happening right now... are lower prices coming soon?
Another short-term worry is that December, 2002 was the best performing month since September 1999 when Goldman-Sachs was caught short in a rising market. Any time there is an extreme of any kind, someone is a big winner and some else is a big loser... the losers tend to close out their positions and the winners tend to take profits. One possibility is that the number of winners selling to take profits might cancel out the number of losers buying to close out their positions. When this happens, the total open interest goes down, but the longs are still long and the shorts are still short. If the Commercials are caught short again, then a 1999 style of spectacular short-covering rally may be seen. In 5-8 years when gold prices are above $2000 we can look back and this timeframe and wonder why we were ever so concerned.
The open interest on Comex Gold is still increasing, so it is not signalling a significant downturn yet. As for extremes, the current total open interest is 206,914 which is 27th on the list of highest weekly readings. As long as open interest is increasing, and volume is increasing, prices will continue to rise. Watch the open interest on individual contract months. As we approach closer to February, 2003 the OI will begin to drop while April, 2003 starts to rise -- this is the Commercial traders rolling from one contract month to the next. When prices fall, volume falls, and particularly if OI falls, then that usually means prices are headed lower.
<<"What's your exit strategy? Russell is hoping it bases here. Zeev will trade it because that's the way you make money in a Bear market. I say leave the next 10% on the table. A plateau of distribution in the gold stocks is coming. Then a correction. And then we revisit it again.">>
I don't really have an exit strategy at this point. I'm lQQking for considerably higher prices on everything who's Au content can be measured in ounces. Time is of little matter to me and while I think there will be playable wiggles, I choose not to go there as I believe with the conviction a true believer that the biggest danger is in being out of the market when some 'news' breaks out and the PoG establishes yet another beachhead.
This is what works for me, Porter, and that is my final answer <VBG> I wish you the best of success in your search for the truth. To ignore the COT numbers may indeed prove to be the expedient solution in your mind's eye, but to me you would be better served to read and analyse the garbage before you throw it out. You just might find some jewel of missing insight that can, somehow, help make your day.
Kindly excuse what must seem like a preacherly manner. I don't mean it as such..... Gold has not become a religon to me.
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