Hi Ken, Having had a very positive response to last week's report, I think I'll make this a regular weekly 'feature' for the non surfers in the house. AHEM! <gg>
I think Arensberg does such a fine job with the CoT numbers that if I knew for sure he was going to continue doing this weekly report, I would stop accumulating the numbers myself.....
Fwiw, the total open interest only dropped 4457 contracts on Wednesday and Thursday, the first two days of the new reporting week.
COT Gold Report - Resistance Bucks Gold, COT Records Fall
By Gene Arensberg 15 Oct 2005 at 05:24 PM EDT
HOUSTON (ResourceInvestor.com) -- A weekly update combining the commitment of traders (COT) data usually released each Friday by the major exchanges, with reporting on the difference between the long and short positions of the largest traders in gold, the Large Commercials (LCs) as of the previous Tuesday, with technical commentary by Gene Arensberg.
Outlook Snapshot: October 15, 2005. (Caution flags flying, short term.)
A splendid global investor-driven bull market rally for gold cut new 18-year highs for the week, but three consecutive attempts to break above the $475-$476 resistance were repelled as both the large commercial net short positions (LCNS) and the COMEX open interest for gold set new record highs.
Despite gold turning in both a higher low and a higher high for the week and despite a continued consolidation of the 9/16 breakout without breaking down, the indicators this report follows have deteriorated during the week raising caution flags.
This report is about probabilities or odds. While the chart has not broken, absent some exogenous geopolitical or natural disaster, a preponderance of the indicators suggests the odds now favor a bit more of a pullback short term.
Please see largely expanded commentary and outlook below.
This Week’s Observations: Friday, 10-14-05
COT Changes. For the 7-week period (6 reporting weeks) from 8/30 to 10/11 gold gained $44.30 or 10.3%. As of the Tuesday cutoff date for the commitments of traders report (COT), the Large Commercials (LCs) have added 73,064 contracts net short for the period to total 212,714 contracts net short. A pace of 1,649 contracts per dollar increase in the metal for the period which remains below the average rate of change (ROC). Usually, repeat usually, this is consistent with a continuation of the current trend.
The combined large commercial net short position (LCNS) is at yet another new record high. Tuesday’s 212,714 tops the previous record set just last week of 202,724, which bested the April 5, 2004 previous record of 196,307 contracts net short. The current record is in connection with a technical breakout for the metal. The 2004 record was set in connection with a double top high on gold.
For the COT week ending 10/11, the LCs added just 9,990 contracts to the net short side while gold strongly advanced $9.60 Tuesday to Tuesday. That is a much less than average rate of change (ROC) of 1,041 contracts added net short per dollar advance in gold metal and considerably less of an increase than expected. This indicator by itself is also normally consistent with a continuation of the current trend.
The total COMEX open interest increased from last week’s 363,529 contracts to a new record high 370,844 contracts, topping the 2004 record of 370,786 by 58 contracts.
For a little perspective, as of Tuesday, traders on the COMEX were on either side of paper gold commitments for 1,153 tonnes of gold bullion with a notional value of over $17.6 billion. That is roughly equivalent to almost half of the total annual global mine production of gold. Of the total, 312,041 contracts were for the near active December contract, meaning that just 58,745 contracts (5.9 mm ounces) were open for all the future months through June of 2010.
Possibly important, the LCNS for this week occurred on what turned out to be the high close for the week (Tuesday $475.95) and within $5 of the Wednesday intra-day summit of $480.20. Both the LCNS and the open interest are at record highs but the ROC increase in LCNS for the week was small. Why?
Putting it another way, as both the LCNS and the open interest marked new record highs the LCs were only willing to add a statistically insignificant 9,990 contracts to their net short pile, which is not at all what we have come to expect prior to a major sell-down. (Emphasis on the word “major.”) Has the COMEX reached a kind of practical near-maximum open interest, which precludes a large ROC from forming? Or, is it just that the LCs haven’t yet concluded that a gold peak has occurred?
Either way, given this week’s volatility and the less than expected increase in the LCNS it will be deliciously interesting to see how the COT changes next week. Since Tuesday, the open interest on the near-active December contract has actually gone down from 312,041 to 304,738 contracts (that’s December only) while the contract price fell from $479.80 to $471.80, or $8. The absence of a telltale spike in LCNS is perhaps suggesting only a garden variety bull market pullback, not a major plunge.
Repeating a note from last week’s report: “With the LCNS at a new record high, the obvious possibility of a sudden long-liquidation will remain until the LCNS is substantially reduced. One of the strongest arguments for stops on the tight side. However, such a sudden long liquidation is unusual without a higher ROC on the LCNS occurring first. The flip side of that coin is with such a large commercial net short position it might not take all that much of a geopolitical or natural disaster event to cause an explosive short-covering rally.”
Gold Chart. What a remarkable, albeit steep run it has been since hurricane Katrina assisted the last turning low of just under $430 at the end of August. Six straight weekly advances including a 9/16 breakout above the 2004 high of $456.87 and this week’s attempt at $480 make for an impressive bull market romp.
This week the metal continued to consolidate above the 9/16 breakout, but finally turned in a lower weekly close. Once again this week’s low and high were higher specimens.
Attempted thrusts above the $475-$476 resistance on three consecutive trading days (Monday-Wednesday) were repelled as the gold market entered the week in overbought territory on the weekly chart. That is short-term bearish action, but the bull isn’t giving up easily. Buyers stepped in vigorously Friday to prevent a potential bear rout following reports Thursday of stepped up fund and speculator selling and growing uncertainty over news reports about commodities trading company Refco. Some traders fear that unwinding of Refco hedge fund positions might cause temporary abrupt disruptions in commodities markets. We’ll see.
Momentum has paused as the chart works off the overbought condition turning it neutral to bearish very short term. While the odds favor a further pullback, the primary key to next week’s action will be where support forms, assuming it does of course.
Gold ETF. The largest gold exchange traded fund [NYSE:GLD] stayed pat with its gold holdings at 207.36 tonnes, just under the high water mark of 207.44 tonnes. While this continues to suggest a pause in new wealth flowing into GLD, there has not been an exodus of capital from the fund either. (See streetTRACKS Gold Trust).
Euro Gold. Euro gold gave up € 3.07 for the week closing at € 387.84 (10/14) on the cash market. Earlier in the week euro gold cracked the important psychological € 400 level briefly before selling off in energetic profit taking. Both the euro and the dollar gained some purchasing power against gold by weekend.
Gold has broken out in most major fiat currencies signaling a new phase of the Great Gold Bull. A phase likely to be dominated more by global investment demand rather than currencies. A phase where good old liquidity, or how much global wealth is chasing a finite supply of gold metal at any given time will determine the price regardless of which paper currency is doing the chasing. Adam Hamilton with Zeal LLC has published a new and worthwhile essay, which will interest technically minded traders on the subject of gold breakouts in the major global currencies. (Also see the dollar, euro and gold performance comparison chart).
US Dollar. Last week’s report said: “Metaphorically speaking, it is hard to imagine the dollar bulls giving up without more of a fight, but unless the bulls can mount an assault on the 90.50 resistance pretty quickly, a bearish double top will have just formed with July. If the buck holds near here through Tuesday, it will be very interesting to see how the largest traders reacted to that 200+ basis point knock on the index. We’ll know next Friday.”
Well, the bulls did mount another assault at the resistance, but were once again driven back.
As of the Tuesday COT cutoff, the LCs slashed 3,352 contracts of their combined net short position on the dollar index to 9,487 contracts net short. This, while the index dipped 21 basis points from 90.10 to 89.89 Tuesday to Tuesday. That is a red-hot rate of change (ROC) of 160 contracts per basis point decrease and it turned out to be just ahead of a second shot at the long-term dollar index resistance of 90.50 on Thursday. The index traded as high as 90.43 early that day. By the close on Friday the charge was hammered back 108 basis points to close at 89.35.
While the LCs are still positioned for a weaker dollar, they are less so than the previous week. (See US dollar index graph).
Gold Indexes. Once again the spot gold price marked a new weekly high (intra-day Wednesday), but once again the HUI gold share index lagged the metal. This is a non-confirmation for a second consecutive week, which raises a caution flag.
HUI, Daily, April 2004 to Date
HUI:Gold Ratio: The HUI:Gold Ratio put in a similar performance for the week. It didn’t help that attempts to break above the $475-$476 resistance on gold were knocked back.
HUI:Gold Ratio, Daily, June 2003 to Date
Commentary and Outlook: (Caution flags flying, short term.)
A splendid global investor-driven bull market rally for gold cut new 18-year highs for the week, but three consecutive attempts to break above the $475-$476 resistance were repelled as both the large commercial net short positions (LCNS) and the COMEX open interest for gold set new record highs.
Despite gold turning in both a higher low and a higher high for the week and despite a continued consolidation of the 9/16 breakout without breaking down, the indicators this report follows have deteriorated during the week raising caution flags.
This report is about probabilities or odds. While the chart has not broken, absent some exogenous geopolitical or natural disaster, a preponderance of the indicators suggests the odds now favor a bit more of a pullback short term.
However, longer term as global interest in gold continues to increase there can be little doubt that a new phase of the Great Gold Bull is getting underway subject to normal bull market-style corrections.
On the bullish side of the ledger, spot gold managed to mark a new higher high and higher low for the week. By definition it continued to consolidate above the 9/16 breakout. The LCNS rate of change for the 7-week period is still below the multi-week average and the 1-week rate of change was very small relative to the increase in gold. In other words, there was still not a telltale spike in the LCNS as of Tuesday. Dips continue to be eagerly bought.
The LCs are still positioned for a weaker US dollar, but less so than last week. Global wealth has been seeking safety from diluted fiat paper currencies of late and longer term that is likely to continue in this observer’s opinion. The Great Gold Bull has taken on a more international complexion, probably for the foreseeable future.
On the bearish side, the large commercials now have the largest net short position for gold on record. The open interest on the COMEX is also at a record high. Gold is apparently working off being overbought on the weekly charts. After three consecutive daily attempts to break above the $475-$476 resistance failed, on Friday aggressive profit taking showed. The HUI gold share index has lagged spot gold for two full weeks. Money flow into the largest gold ETF has paused.
Euro gold, a very important driver currently, may need time to consolidate before marshalling enough momentum to break the € 400 barrier. (We’ll see on that too). A pullback on gold would probably be a healthy thing about now and might prevent the kind of harsh corrections, which normally occur following parabolic blowouts.
Caveat: The one other thing that could dramatically alter the outlook, and this week’s caveat, is an unexpected thrust above about the $479 level which holds. Such an event after this week’s failed attempts to breakout would be radically bullish and likely result in a wild short-covering rally. If that should happen then obviously the caution flags could be temporarily stricken.
Caution flags suggest that a short-term top is in or is near (within 3%). They call for tight stops as both advances and corrections can be dramatic at extremes. High volatility and wide-ranging days remain very possible short term.
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