-- Posted Monday, 19 June 2006 | Digg This Article
Over the past years that I have been privileged to participate in this fledgling generational bull market in gold, I have written a goodly number of essays detailing the Commitments of Traders reports and analyzing how that relates to the price action experienced in the gold futures pit at the Comex.
Having been at this game for a long time now, I can usually get a pretty good feel for who is doing what during the course of the week by comparing the price action in the pit against the previous week’s COT report and looking at the long term trend of a market. In what I consider to be “normal” markets, a rising market in an established bull trend will usually see the bulk of the speculators, both large and small, on the long side with the bulk of the commercials taking the opposite or short side. That only makes sense as commercials/producers are using the speculator buying to implement scale-up selling programs to lock in profits. They sell a little here and a little there and continue to do so as prices rise, assuring themselves of a profit and minimizing risk which the speculators are more than willing to assume in exchange for an opportunity to make a profit. The higher the market rises, the happier these true or bona-fide hedgers are as that means higher selling prices for their goods.
Over the past years in this gold market we have witnessed some anomalous patterns in the open interest activity that I have detailed in great extent in various essays I have published out on the web. Unlike “normal” markets, the pattern for gold has been for the commercials to meet determined speculator buying in gold with fierce resistance all the way up in a manner that is normally not consistent with price maximizing selling. Upward progress is met, not with commercials standing aside and allowing the funds to drive the market north and then selling lightly into that buying only enough to cover their immediate hedging needs, but rather with fierce and determined selling that fights and contends against all upward progress. I have therefore come to expect this pattern as the norm in the gold market.
Imagine my surprise then to learn from today’s release of the COT report that the commercial category went even one step further than I had come to expect from them. Their normal pattern has been to sell with steady determination but only into rising prices as they attempt to cap the price rise and resist the upward progress of the metal. Once the fund buying has abated or stalled, they then launch a counterattack of heavy offers which overpower the bidders in the market. This has the intended effect of causing a quick retreat by the locals who front run their offers and proceed to knock the market down into the sell-stops below which are then automatically touched off turning speculators into sellers. The process then feeds on itself producing an avalanche of selling which trips all the short term technical oscillators and has the black boxes lighting up the computerized platforms with even more speculator sell orders which soon turns into a veritable blood letting.
The cartel of commercials then use this forced speculator selling to buy back or cover the short positions they had built up over the course of the price rise congratulating themselves for having fleeced the momentum based trading funds who chased the market higher. We have seen this pattern repeat itself going all the way back to 2001.
What is quite extraordinary about today’s report was that it detailed something which I have not seen during the course of this entire bull market since 2001, namely, increasing short sales by the commercial category in the midst of a falling market – not just a falling market, but a precipitously falling market at that. This is a startling new development.
What is even more remarkable is that the big trading funds, instead of dumping their longs into the lap of the waiting commercial cartel, actually appear to have been buying on the way down! This also is a FIRST! In other words, we have seen in one week a COMPLETE REVERSAL of the norm of the last 5 years in the gold market. As a matter of fact what I had been expecting to see was a REDUCTION in the net short position of the commercial category and a reduction in the net long position of the trading funds. I assumed that the gold cartel would dupe the trading funds into establishing a huge number of new short positions even as that same category sharply cut the number of long positions. I also assumed that the same thing would happen among the small spec category.
What actually happened was the exact opposite except for the small specs who ditched more shorts than they did longs! The big trading funds INCREASED their net long position as the market fell – something they have not done throughout the history of this past bull market. Instead of piling on a ton of new shorts, the trading funds added only a bit more than 700 new shorts and almost 4,000 new longs into the price weakness. Could it be that this category is finally wising up and actually learning to beat the cartel at its own game? We will have to see but the fact that this has occurred at all is nothing short of astonishing.
Notice the data from last week’s COT report and this current’s week COT report.
Let me try to put it another way. The COT report covers the activity of the traders from the Tuesday of the week past to the Tuesday of the current week. In other words, if we want to learn who was doing what from Tuesday to Tuesday we can get a very good picture from looking at that report. Unfortunately the report does not tell us who was doing what on Wednesday, Thursday and Friday of the current week. That will show up in the following week. Still, we can get enough information to correctly identify the transition of players for a week’s interval of time.
Having established this we can now go back to the gold chart and look at the price action of the market from Tuesday of last week, 6-6-2006 to the Tuesday of the current week, 6-13-2006.
Click on image for a larger view
On Monday of last week, the price of August Comex Gold closed the session at 648.70. This will be our starting point for the analysis that follows since the COT report will show us who did what from the following day until Tuesday of this week as compared against the price action of gold.
The next day, Tuesday, 6-6-2006, gold dropped down to 634.70. Wednesday it went down to 632.60. Thursday it took another huge hit and closed down at 613.80. Friday it closed down at 612.80. The following Monday, at the start of this week, it continued its downward progress and closed at 611.30. Tuesday, the final day of this week which is covered by the COT report, it was walloped for a gargantuan hit of $55 closing all the way down at 566.80. It was further mauled overnight beginning in the afternoon Access session on into Tuesday evening when it began to gets it footing in the late afternoon Asian action and early morning European trading session. To sum up – gold went straight down from Tuesday of last week thru Tuesday of this week to a tune of a loss of $81.90, and if you include the Tuesday overnight action, a whopping loss of $102.30 in one week!
To further amplify on what I have described previously - Whereas the normal pattern of the last five years in gold as I have described above would have expected us to see the commercial cartel covering or reducing their shorts and booking profits, the exact opposite occurred – the commercial shorts, aka known as the gold cartel, SOLD THE ENTIRE WAY DOWN – instead of REDUCING the number of their shorts and booking profits they actually PUT ON MORE OF THEM! The COT report reveals that they added a total of 5,282 BRAND NEW SHORTS as the price of gold collapsed. They have NEVER done this before during any time in this bull market in gold since it began way back in 2001.
What does this mean? – quite simple – it means that there was a concerted effort on the part of this group of short sellers to FORCE THE GOLD PRICE DOWN. They had absolutely no interest in booking profits on existing shorts as the price tumbled some $100. This is a stunning development as it clearly indicates a concerted attempt to derail what was becoming a runaway bull market in the gold price that was threatening to garner far too much public attention. Remember - gold’s perennial function is to serve as the financial “canary in the coal mine” which alerts the workers to hidden, toxic dangers. Quite simply, gold’s stunning rally to $730 in the matter of a few months time was sending shock waves through the corridors of the monetary elites who were “looking into the abyss” if gold continued its meteoric rise. Something had to be done and quickly or this thing was going to get out of hand.
Along that line, this past week I had sent some comments up to my good friend Bill Murphy over at GATA’s fine site, www.lemetropolecafe.com detailing both in written and in visual chart form what appeared to me to be a deliberate assault that was being launched against the gold market beginning in the thin and illiquid conditions of the aftermarket Access trading session as soon as it opened for the resumption of trading in the afternoons. Bill included those in his daily Midas reports. Also, my trading buddy and good pal Jim Sinclair (www.jsmineset.com) had posted the same comments along with the price charts detailing the attack as shown on the 30 minute interval chart. As a trader who trades exclusively in the CBOT’s full-sized electronic gold contract every single day, I am quite attuned to the normal order flow into that “pit”. What caught my eye immediately beginning last week and continuing with the assault on gold early this week, was the huge size of sell offers that came flooding into those pits late last week and earlier this week during the normally comparatively quiet afternoon session. Offers of 500+ to sell were relentlessly pounding the CBOT electronic gold contract. One enormous sell order of 943 hit the pit much to my stunned amazement. I found myself talking out loud to myself saying, “What in the world is going on here? Did I miss something happening in the world? Did someone Central Banker or Fed governor say something? Who in the heck is selling like this?”
To give you some perspective – I rarely see buy or sell orders in the early afternoon session exceeding 100 contracts going either way. Clearly some entity was attempting to mercilessly pound the price down into lower levels looking to run stops in the thin conditions and set off a cascade of further selling which would then be expected to carry over into the TOCOM session that evening driving the price even lower as Japanese selling took over.
So the question becomes, who would do such a thing and why?
Then it all began to make perfect sense if one understands what both Jim Sinclair and Bill Murphy and the GATA gang had been saying about this recent price decline in gold, namely, that is was an orchestrated and deliberate attack by the Central Bankers of the West to break the back of the gold market and defuse the warning message that gold was sounding abroad. In our opinion, it started with the Bank of England either mobilizing its own gold supplies or gold from the IMF. This gold was then used to temporarily flood the market with extra supply with which to overwhelm the soaring investment demand thereby knocking the price of gold, and other commodities sharply downward to give the intended effect that fears of inflation due to commodity price rises had been effectively contained. In order to affect the most carnage on gold, this surreptitiously mobilized supply of extra gold had to be accompanied by a concerted and well-coordinated effort on the part of the Western Central Bankers and some of their allies of tough anti-inflation talk giving the impression that the CB’s were going to be especially vigilant to nip any inflation genie in the bud.
Think about this a bit and see if we can put two and two together. If you knew in advance that the BOE was about to make a move to derail the surging copper market and bail out its friends at the LME which was on the verge of witnessing a default among some of its members who had stupidly sold short into a roaring bull market in copper, and you knew that they would also do this by launching an all out assault on the base metals and especially on the gold price using mobilized Central Bank vault gold, what do you think you could conclude? Answer – the price of gold was going to fall sharply as it would be temporarily overwhelmed by the extra supply hitting the market. If you knew this would you not sell with complete reckless abandon? Would you not attempt to chase the market down as far as you could pushing into one set of sell stops after another? Would you not do this in the hopes of wrecking as much carnage on the market as possible and then eventually clean up by buying all those shorts back after you had broken the back of nearly every would-be gold bull on the planet? I know I sure would have! You would be a complete nitwit not to recognize such a gift horse being dropped into your lap!
Well, that is exactly what I believe occurred. The BOE in conjunction with their cohorts at the Fed, would have tipped off its agents, or better yet, would have plotted with its agents Goldman Sachs, et al, that is was about to mobilize its gold or the IMF’s gold and dump it onto the market. In the meantime Goldman Sachs and friends were unleashed to smash the paper markets in gold at both the Comex and the CBOT, and run as many speculators out of it as possible while seeking to inflict the most technical damage possible on the price charts. The intended effect was to be to so completely dishearten and discourage the public and the investment funds from buying gold that it would suffer an ignominious death and fall off the radar screens of investors. That would effectively get it out of the headlines and remove the pesky metal’s telltale warning signs about the true state of the global economy. No more gold stories equals happy Central Bankers.
There is no doubt that the plan worked to near perfection – I have never seen so much near total despair and disillusionment among the friends of gold as I witnessed this past Tuesday and early Wednesday. Out of everywhere, as if on cue, analysts confidently pronounced that the bull market in gold and in commodities was over, finis, kaput!
However, a funny thing happened on the way to the forum. Someone showed up to meet the brazen sellers and began to buy in huge lots. Gold quickly ricocheted off the $545-$550 level running all the way back to near $590 in two days. Today, Friday, 6-16-2006, when the same group of sellers once again attempted to break the back of the gold market which had come roaring back in overnight trade in both Asia and in Europe, and began their coordinated selling assault during the New York trading session (what else is new), out of nowhere buying came out of everywhere forcing them to beat a hasty retreat. Gold, which at one point had been knocked down $20 off its overnight highs, came back with a vengeance stuffing the shorts and forcing them back out as it closed the session in remarkable fashion for a Friday afternoon.
The strong close augurs well for next week although gold did suffer some pretty heavy technical damage this week as a result of the attack. It will take our friend some time to repair the damage suffered but it demonstrated true grit this week by coming back from such a fierce beating in so noble a fashion to end the week. One has to understand that as a result of the work of GATA and especially the conference in the Klondike that the big physical market buyers know full well what is going on in the gold market and were laying in wait for Goldman and company. And why should they not? If one understands the war involving gold and knows that there exists a group of entities who are intent on smashing the price of gold and will utilize all the resources at their disposal, why not wait for them to pull one of their stunts, step aside for a while, let them knock the price back down and then buy all that you can fit into your boats at a greatly reduced price level. After all, if you are determined to own gold and increase your holdings of it as the Russians, Chinese and Arab interests are, why not let the fools make it available to you at a nice big discount and then load the boat complements of your short-sighted but “generous” benefactors?
In conclusion, we will need to see the price action this next week and the COT next Friday along with the daily open interest reports to see if the gold cartel is forced to cover those brand new shorts, many of which are underwater at this point and whether the funds will now trade this gold market a bit more intelligently. We want to see if gold can hold the recent lows on any possible subsequent revisiting of those lows. If so, and if especially the volume dries up in comparison to that of the day when the lows were made, then the bottom is definitely in and gold will start its next leg up from this region after a period of base building. We know that down at those levels there are huge buyers waiting in the physical market who want to obtain gold at what they consider to be a “value” area. That is the key. Those guys want all the cheap gold they can get and will pounce on it at a price they are happy with. If the CB’s want to dump more gold on the market, those big buyers will be more than happy to relieve them of it all. Heaven help the new shorts in this market if that gang of physical market buyers decides this is as cheap as gold is going to get again.
June 16,2006
Dan Norcini
Dan is a professional off-the-floor commodity trader residing in Texas and can be reached at dnorcini@earthlink.net with comments.
-- Posted Monday, 19 June 2006 | Digg This Article
